تصمیمات توزیع طرح بازنشستگی مزایای تعریف شده توسط کارمندان بخش دولتی
|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|9195||2013||16 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Public Economics, Available online 11 June 2013
Studies examining pension distribution choices have found that the tendency of private-sector workers is to select lump sum distributions instead of life annuities resulting in leakage of retirement savings. In the public sector, defined benefit pensions usually offer lump sum distributions equal to employee contributions, not the present value of the annuity. Thus, for terminating employees that are younger or have shorter tenures, the lump sum distribution amount may exceed the present value of the annuity. We discuss the factors that may influence the choice to withdraw funds or not in this environment. Using administrative data from the North Carolina state and local government retirement systems, we find that over two-thirds of public sector workers under age 50 separating prior to retirement from public plans in North Carolina left their accounts open and did not request a cash distribution from the pension system within one year of separation. Furthermore, the evidence suggests many separating workers, particularly those with short tenure, may be forgoing substantial monetary benefits due to lack of knowledge, understanding, or accessibility of benefits. We find no evidence of a bias toward cash distributions for public employees in North Carolina.
Each year, millions of American workers leave their jobs prior to retirement either by choice or due to termination by their employers. Many of these job changers participate in defined benefit pension plans. On leaving their employers, these workers are often given a choice of keeping their retirement accounts open, thus maintaining a claim on a future life annuity, or accepting an immediate lump sum distribution (LS) of their pension assets. This decision is distinct from that faced upon retirement, since workers maintaining their account will not receive any cash benefits until reaching retirement age. Workers who accept the LS are then given a choice of whether they want to roll the funds over into an IRA or to accept the cash as taxable income and also pay a tax penalty for early withdrawal if under age 59.5. These choices can have significant long run implications for future retirement income and shed light on the magnitude of leakages from retirement saving. In a report describing sources of leakage of workers' retirement savings from 401(k) plans, the Government Accountability Office (2009) concluded that cashing out benefits at job separation represents the principle form of leakage of retirement savings and has the largest impact on retirement wealth accumulation. The problem of leakages is greater among younger workers and males, who have been found to cash out benefits at higher rates (AonHewitt, 2011). Economic theory argues that to maximize lifetime utility one should consume such that utility levels are smooth over time. One method of achieving utility smoothing is through the purchase of annuities (Yaari, 1965). However, a series of national surveys and economic studies found that individuals rarely purchase annuities in the open market (see, e.g., Mitchell et al., 1999). Further, when given the choice in their pension plans of a life annuity or a LS, workers often chose the LS (see, e.g., Brown, 2001, Engelhardt, 2002 and Hurd and Panis, 2006). Thus, many workers tend to reject the opportunity to receive a certain flow of income throughout retirement in favor of receiving cash now, which therefore results in individuals assuming the task of managing funds on their own during their retirement years. This conflict between theory and individual choices has been called the “Annuity Puzzle.”1 If cashed out benefits are spent on immediate consumption rather than saved for retirement, this leakage will result in lower income and income security in retirement. Under federal pension regulations, defined benefit plans in the private sector must offer an annuity and provide participants with information on their future annuities. The LS's for these plans are required to be calculated as at least equal to the present value of the retirement annuity using approved interest and mortality tables.2 Things are very different in the public sector. Public sector defined benefits plans usually require explicit employee contributions each pay period, and LS's are based on the employee contributions and not the present value of the annuity. Thus, a public sector worker's choice of whether to take a LS reflects both his/her individual preference for annuitization and potential differences in the net value of the LS and annuity options. Defined benefit plans continue to cover most state and local employees and virtually all of the plans offer workers the option of a LS at job separation or retirement (Clark et al., 2011). We examine the choices terminated workers younger than age 50 make using data from the North Carolina Teachers' and State Employees' Retirement System (TSERS) and the North Carolina Local Governmental Employees' Retirement System (LGERS) by examining information contained in the administrative records of the two retirement plans.3 We restrict our attention to individuals under age 50 as they are not yet eligible to retire and receive immediate annuity benefits. As of the end of 2010, these two public pension plans covered 803,636 employees and retired workers. Our unique dataset contains all terminations from state and local government employment in North Carolina between 2007 and 2008 and tracks behavior through the end of 2009, allowing us to observe choices made within one year of separation for all terminated workers. The dataset includes relevant economic and demographic information on all individuals who left state or local employment during this time period. Public sector defined benefit plan participants face a series of choices concerning their pension accounts when terminating employment prior to retirement, as illustrated in Fig. 1. The first decision a worker must make is whether to maintain his/her pension account or accept an immediate LS.4 From an economic perspective, a worker should compare the value of the LS to the present discounted value of the life annuity (PDVA) which is set to begin at some point in the future. However, as we will see later, there are a number of factors that make this decision more complicated that a simple wealth comparison.The default option is for the worker to maintain the pension account; a departing worker must file a request with the retirement system in order to receive a LS. Depending on the rules of the pension plan, a worker might also have the opportunity to return to work with the same employer and have prior service credits count toward a future retirement benefit.5Fig. 1 also shows that workers who request a LS must specify whether they want to receive cash or have the funds rolled over into another approved tax qualified retirement plan such as an IRA. If the worker is sent a check, she could subsequently deposit the funds into an IRA and avoid current taxes and penalties if she follows the IRS guidelines. It is important to remember that individuals preferring to insure against longevity risk by annuitizing have the option to withdraw funds, roll them over into an IRA, and ultimately purchase an annuity. Thus, an informed worker should decide whether to withdraw funds based on the highest present value of the distribution options, appropriately measured, taking into account predicted inflation, interest rates, and various types of risk. We calculate how the decisions made by separating workers are affected by the value of the distributional options available to them. The relative generosity of the two options is estimated using details of the plan characteristics and information provided by the retirement system. We find that fewer than one-third of all terminating public employees requested a LS within one year of separation, despite the finding that for over 70% of terminations, the LS was larger than the estimated PDVA. These results indicate a low probability of leakage from retirement funds, although many workers are seemingly forgoing the possibility of higher retirement income possible from rolling over funds to an IRA.We offer several potential explanations for why the distributional choice from a public pension plan is more complex than a simple wealth comparison at a point in time. First, separating participants in TSERS qualify for retiree health insurance from the State Health Plan with no premium as long as they are receiving a monthly annuity from TSERS. This option is available for virtually all vested state employees (participants in TSERS), but local employees (participants in LGERS) are not covered by the State Health Plan.6 Comparing distributional decisions by state employees in TSERS to those of local employees in LGERS provides some indication of the effect of retiree health insurance on the choice to ultimately receive a retirement annuity. Despite the difference in coverage of retiree health insurance in the two systems, we do not see a large difference in the distributional choices between separating workers that will qualify for retiree health insurance and those that will not. Second, we consider the likelihood that terminated participants may plan to return to public employment. The expectation of returning to public employment might make maintaining the account the optimal choice for these individuals. However, we document that workers who ultimately returned to work by December 2010 were actually more likely to withdraw funds within one year of separation. Third, we discuss the influence of alternative investment options, macroeconomic conditions, and confidence in the retirement system. Maintaining the account still allows for the option of requesting a LS at some future date. Because the account balance accrues interest at a guaranteed rate of 4%, financially savvy individuals may choose to maintain their account balances and accept larger LS's at a future date as part of an investment portfolio. However, we do not find that the 12-month return on the S&P 500 is related to the probability of withdrawing funds, once local macroeconomic conditions are added to the model. There are mixed results when considering the 1-year Treasury bond rate, but, if anything, higher bond rates are associated with a reduced probability of withdrawing funds. Moreover, we do not see a large difference between the disposition choice of non-vested workers (who do not earn interest) and vested workers. This indicates that workers are not responding to incentives of outside investment options. We do find that when the state unemployment rate rises, individuals are significantly less likely to withdraw funds. This could be due to selection into who is separating employment, or it may be that individuals more heavily rely on defaults in times of economic turmoil. The final explanations we consider for why public sector workers in North Carolina do not withdraw funds at a higher rate are financial literacy, peer effects, and inertia. The default is to leave funds in the system. The behavior we observe is consistent with many individuals accepting the default option and forgoing potentially more valuable benefits. We find evidence consistent with peer effects, but cannot distinguish between correlation in unobserved characteristics and the influence of peers in this study. After the analysis of the decision to accept a LS rather than maintaining one's account balance, we then examine the decision between cash and a rollover of pension assets by those who opted for a LS. The decision on spending versus saving the LS distribution has received considerable attention by economists; however, only a few studies have been able to observe this choice in administrative records rather than survey data (see Bryant et al., 2011). We find that nearly 90% of separating workers that request a LS elect to receive the funds as cash, rather than rolling over, suggesting a high probability of leakage of retirement funds among these individuals. Of course, individuals who select a cash distribution can still move the funds into a retirement account, pay off debts, or save in non-retirement accounts, rather than spending the money on immediate consumption. 2. Relevance of findings for participants in public and private DB plans Due to similarity of TSERS and LGERS to other state and local pension plans, the results presented in this analysis should be relevant to understanding worker behavior in most public pension plans. While the findings also will shed light on potential behavior of participants in private defined benefit plans, the difference in pension coverage and plan characteristics between the public and private sectors of the U.S. economy is striking. The Bureau of Labor Statistics (2011a) found that in November 2011 only 22% of full-time private sector workers were participating in defined benefit plans, compared to 87% of full-time public sector workers. With 19.2 million individuals working as state and local employees, this implies that there were approximately 15 million public sector employees participating in defined benefit plans (Bureau of Labor Statistics, 2011b). Historically, most defined benefit plans provided only annuities to their participants; however, over time increasingly plan sponsors have adopted provisions that allow their retirees to choose between receiving a lump sum distribution (at or prior to retirement) or accepting an annuity at retirement. Under federal pension regulations, defined benefit plans in the private sector must offer an annuity. Traditional plans typically provide participants with information on the expected monthly payout amount of their future annuity. According to federal guidelines, if a lump sum distribution is offered, it must be at least equal to the present value of the retirement annuity using approved interest and mortality tables. As discussed further below, things are very different in the public sector where plans usually require employee contributions and lump sum distributions are based on the employee contributions and not the present value of the annuity. The lump sum option is becoming increasingly more common in private sector defined benefit plans. In 1989, only 2% of defined benefit plans offered by medium and large firms gave workers the option of taking a lump sum distribution, but by 1997 this number had risen to 23% (Bureau of Labor Statistics, 1990 and Bureau of Labor Statistics, 1999; also see Moore and Muller, 2002). According to data from the National Compensation Survey, in 2007 52% of all workers were in plans that provided employees the option of selecting a lump sum distribution instead of accepting the life annuity (Bureau of Labor Statistics, 2007 and Purcell, 2009). Some of the increase in defined benefit plans allowing lump sum options may be due to the growth of cash balance plans and other hybrid plans that specify the account balance as a lump sum throughout the worker's career. Hybrid plans almost always offer a lump sum option for departing and retiring workers. As more and more pension participants in both the public and private sectors of the economy confront distributional choices in their defined benefit plans, it is increasing important to understand the determinants of this choice and its implications for retirement income. When making comparisons between choices made in the public and private sector, it is important to note that differences in plan design and pension preferences may reflect, in part, a labor market sorting of workers based on workers' risk preferences. Using survey questions designed to measure risk aversion, previous studies in the United States and Europe indicated that employees in the public sector tend to be more risk averse than those in the private sector (e.g., Bellante and Link, 1981, Bonin et al., 2007, Hartog et al., 2002 and Pfeifer, 2010). Similarly, public sector workers tended to choose less risky options in experiments (Buurman et al., 2009), took fewer financial risks (Roszkowski and Grable, 2009), and were observed to select jobs that have smaller fluctuations in annual earnings and greater job stability (Bonin et al., 2007). Thus, one should be cautious in extending the findings regarding the determinants of choices made by public sector workers to workers in the private sector with DB plans that allow for lump sum distributions.
نتیجه گیری انگلیسی
Our analysis shows that public employees face very different choices than do private sectors employees. Whereas private sector plans are constrained by law to offer lump sum distributions (LS's) that are greater than or equal to the present value of the future annuity, public sector pension plans base the LS on employee contributions and credited interest. Hence, the LS value is not directly linked to the value of the life annuity. Leakages of retirement savings when participants in defined benefit plans change jobs is a two step decision process. First, if the individual decides to leave his/her funds in the pension plan, no leakage occurs at this time; however, individuals can request a LS in the future. Second, having requested a LS, the individual has the option to take the distribution as cash or to directly rollover funds into an IRA. Using administrative records from North Carolina retirement plans, we provide a detailed picture of the distribution decisions of workers ages 18 to 49 that separated prior to retirement from public pension plans in North Carolina between 2007 and 2008. We show that, for younger workers and those with fewer years of service, the LS typically is larger in value than our approximation of the present value of the annuity (PDVA), yet only one-third elected the LS. This fraction does not differ considerably by vesting status or by eligibility for retiree health insurance. Among participants in the North Carolina retirement system, about one third of terminating workers choose to withdraw funds. However, this is an overestimate of potential leakages of retirement assets. Of those who request a LS, approximately 90% requested cash rather than rolling over directly to another tax qualified retirement account. This could reflect a perceived need for cash for current consumption or paying off debts. It might also be the result of poor understanding of the tax consequences of this choice and the need to save these funds for retirement. Of course, workers could still deposit the cashed-out benefits into an IRA themselves. The high rate of cash-outs suggests a sizeable reduction in retirement wealth accumulation and suggests that there is a considerable amount of “leakage” from the retirement savings of public sector workers in North Carolina. In a related paper, Clark and Morrill (2012) find that among workers who separated from public employment in 2007–2008 and were eligible for an immediate reduced annuity (age 50 with at least 20 years of service), 90% opted to receive an immediate annuity. Of those who were eligible for an immediate unreduced annuity (30 years of service, age 62 with 25 years of service, or age 65 with 5 years of service), 99% selected some type of immediate annuity offered by the plan. Thus, for retiring public employees in North Carolina, almost all select an annuity option and reject the offer of a LS. On the basis of these findings and those in the current paper, it appears that public sector retirees in North Carolina are not part of annuity puzzle and instead overwhelming select annuities when they are offered. One might expect that all non-vested terminations request a lump sum distribution since they are not entitled to a future retirement benefit and earn no interest on funds left with the system. Yet we observe that two thirds of those leaving the systems in 2007 and 2008 left their accounts open. Given the evidence on financial literacy and inertia in the general population, one might speculate that non-vested terminated workers are unaware of their ability to access these funds, do not understand that they have no claim on a future benefit, do not understand that the funds will not earn any interest, or simply do not take the time to request a LS. Economic and psychological studies indicate that workers often merely accept default options. In this case, the default is to leave the account open, thus we may think that workers leaving the system do not take the time to request a distribution of their pension account. To address this concern, the plan could change the default to be a LS for non-vested workers. Clark and Morrill (2012) find a similar result for non-vested workers over the age of 50 with only 36% of terminated workers aged 50 to 59 selecting a LS. While the proportion of those choosing a LS rises somewhat with advancing age (50% of those over age 65 chose the LS), it is hard to explain why these older non-vested terminating workers would leave their funds with the system. We postulate several factors that might explain why terminating workers for the most part do not appear to respond to the relative size of the PDVA and LS. Given that vested employees receive a 4% annual return when funds are left in the system, individuals can consider this as an investment option. However, regression analysis does not support the hypothesis that greater returns on investments outside the retirement system increase the likelihood that workers will request a LS There is some evidence that as the economy worsened, as proxied by state-level unemployment rates, individuals were less likely to withdraw funds. However, we have a limited time series available, so are not able to disentangle the effects economic conditions, labor market conditions, outside investment options, and confidence in the retirement system. We find that there may be an important role for defaults and workers may not be well informed about the value of their benefits.