TRENDS IN PENSION CASH- OUT AT JOB SEPARATION AND THE EFFECTS ON - PowerPoint PPT Presentation

TRENDS IN PENSION CASH- OUT AT JOB SEPARATION AND THE EFFECTS ON LONG- TERM OUTCOMES Philip Armour, Michael Hurd and Susann Rohwedder SIEPR October 7, 2016

Why study pension cash-out? 2  US provides large tax incentives to encourage private-pension savings  Tax penalties on early withdrawals  Large Fraction of Pension Plans Have Cash-Out Options  $$$ at risk to be spent before retirement Effectiveness of policies promoting retirement-income security depends on  importance of pension cash-outs and  their long-term consequences

This paper 3 Using long panel from the Health and Retirement Study  Trends in pension cash-outs among older workers  Cohort differences  Cumulative cash-out behavior over time  Individual and household-level assessments  Investigate precipitating events leading to cash-outs  Relate cash-out choices to subsequent retirement security outcomes

Time Period: 1992 - 2012 4 Some important trends in  Labor force participation  Macro economy

Increases in Labor Force Participation among older males, not among younger 5 Labor force participation, men 100 90 80 70 age 40-44 60 45-49 50 50-54 40 55-59 30 60-64 65-69 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Females: increases throughout, except most recent younger cohorts 6 Labor force participation, women 100 90 80 70 40-44 60 45-49 50 50-54 55-59 40 60-64 30 65-69 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Trends in the Macro Economy 7  Rise and fall in house prices  Stock market drops  Unemployment: recession of 1991 and 2008

Macro trends and Great Recession 8

HRS Data: Cohort Comparisons in Pension Cash-out 9 3 groups: Age in 2008 Year age 51-56 1992 N=5,570 65-70 1998 N=3,308 59-64 2004 N=3,379 55-60 2010 (baseline comparisons) N=4,748 Follow for 4 waves = 8 years

Worker’s Choices Upon Job Separation 10 Source: Hurd and Panis 2006

Shift from DB to DC plans 11 Baseline comparisons: pension coverage and plan type, conditional on working 50% 40% 30% 1992 1998 2006 20% 2010 10% 0% DC DB None

Majority of DC plans allow LSD, only about half of DB plans 12 Baseline comparisons: pension plan allows LSD, conditional on work & pension on job 100% 80% 60% 1992 1998 2004 40% 2010 20% 0% DC DB

Number of Job Separations over 8 years among those with pension 13 Number and % of separations with pensions by plan type Any DC Any DB % N with DC % N with DB Cohort 1992 44.8% 637 67.9% 956 1998 57.4% 614 62.5% 642 2004 70.1% 591 46.6% 400 Note: Rows sum to more than 100% because some workers have both types of plans

Pension disposition at job separation of DC PLANS with LSD (over 8 years) 14 Cohort 1992 1998 2004 Cashed Out 12.5% 12.0% 18.0% Rolled over into IRA 8.1% 11.2% 20.6% Annuitized 0.0% 0.0% 0.0% Left with Employer 29.3% 28.8% 28.7% Transferred to New Employer 57.3% 52.6% 36.4% Lost 2.7% 1.9% 2.9% Other 2.2% 3.8% 3.2% All statistics weighted.

Pension disposition at job separation of DB PLANS with LSD (over 8 years) 15 1992 1998 2004 Cashed Out 17.1% 15.3% 20.0% Rolled over into IRA 15.5% 14.6% 27.9% Annuitized 0.0% 0.0% 0.0% Expecting Benefits 24.2% 22.0% 26.5% Drawing Benefits 57.7% 57.4% 29.8% Lost 0.7% 0.6% 3.9% Other 2.3% 5.6% 3.8% Weighted.

What are People Doing with DB Cash- outs? 16 DB Cash-Out Uses by Cohort, Weighted % 1992 1998 2004 Spent 24.8% 21.9% 31.0% Saved 55.9% 55.7% 29.2% Debt 19.3% 18.6% 38.3% Durables 0.0% 3.7% 1.5%

Cohort comparison: reason for job separation among DC cash-outs 17 45% 40% 35% 30% 25% 20% 1992 15% 1998 10% 2004 5% 0%

Cohort comparison: reason for job separation among DB cash-outs 18 60% 50% 40% 30% 1992 20% 1998 10% 2004 0%

Shocks around time of job separation: Some are associated with higher cash-out propensity 19 Among those separating with a pension, fraction who cashed out: Overall: 18.6% Shock at (or around time of) job separation Fraction cashed out Lost Health Insurance 36.2 Got Divorced 20.7 Became Widowed 19.5 Became Work-Limited 22.1 Health Worsens 19.4 Became Poor Health 26.5 Fell Behind on Mortgage 54.6 Any Mortgage Issues 47.2

Predictors of Pension Cash-out: DB and DC plans with lump-sum option  Probit estimation  26 right-hand variables, including shocks  Summary of noteworthy effects  Increasing in … (and significant)  Age  Unemployment rate  Race (African-American)

Predictors of Pension Cash-out: Probit, DC and DB plans with lump-sum option (cont.)  Decreasing in… (and significant)  Wealth  Education  Planning horizon  Has health insurance  DC plan value  Higher in later cohorts, but not significant

Long-run outcomes 22  Focus on 1992 cohort, follow for 20 years  Compare cash-out with non-cash-out population  Vital status (about 20% died by 2012)  Health  Income  Wealth

Long-run outcomes 23  Distinguish 3 groups in 1992 cohort:  Never separated from a job  Separated from a job, but never cashed-out  Separated from a job and cashed-out at least once Note: About 20% of 1992 cohort had died by 2012 Among those still alive, 58% retired by 2012 Any differences in 2012 outcomes across these 3 groups?

Cash-out sample has worse baseline statistics and worse 2012 outcomes 24 Among those retired by 2012 Log HH Wealth HH Income Health 1992 Measures for those Retired by 2012 (1=poor) 11.68 70311 3.82 Never separated from Job to Non-Ret State Separated from a Job, Never Cashed-Out 11.58 69512 3.86 Separated from a Job and Cashed-Out 11.23 53779 3.49 2012 Measures for those Retired by 2012 Never separated from Job to Non-Ret State 11.75 31643 3.13 Separated from a Job, Never Cashed-Out 11.69 32110 3.07 Separated from a Job and Cashed-Out 10.48 22889 2.80

What is leading to worse outcomes? 25  Shocks (economic, health etc.)  Initial conditions or  Cash-outs  compare baseline and outcomes 20 years later for those with cash-out option and those without

Option of LSD does not lead to worse outcomes at population level 26 LSD Option on DB Plan in ‘92 No Yes 80.2% 82.5% Percent alive in 2012 Conditional on survival to 2012 1,548 893 N cash-out of plan 10.5% 17.0% Means Wealth in 1992 193,614 237,083 Wealth in 2012 401,593 433,995 Household Income in 1992 60,239 65,445 Household Income in 2012 35,922 38,302

Option of LSD does not lead to worse outcomes at population level 27 LSD Option on DB Plan in ‘92 No Yes 1,548 893 N cash-out of respective plan 10.5% 17.0% Medians Wealth in 1992 126,000 132,600 Wealth in 2012 220,200 249,750 Household Income in 1992 51,000 53,100 Household Income in 2012 24,461 25,050

Option of LSD does not lead to worse outcomes at population level 28 Ratios of 2012 values to 1992 values DB LSD option No Yes mean wealth 2.07 1.83 mean income 0.60 0.59 median wealth 1.75 1.88 median income 0.48 0.47

Cash-outs & Econ Preparation for Retirement: 29 Our Measure Takes into account  Differential mortality by marital status, sex and education  All resources observed shortly after retirement (pension & Social Security income, bequeathable wealth)  Uncertainty due to mortality and out-of-pocket spending on health care  Taxes  Assessment of adequacy does not require full insurance

Cash-outs & Econ Preparation for Retirement: 30  Spending level age 66-69  Observed trajectories of spending derived from panel data  Initial wealth  Observed pension and Social Security income  Survival curves by sex, marital status and education  Stochastic out-of-pocket spending on health care  Taxes  Stochastic simulations  Couples until widowing; then single  Singles  Well-prepared if 95% or more of simulations end with positive wealth at death of individual

Percent adequately prepared in population 31 Singles: 52% Married persons: 78% N Percent prepared Never Separated by age 67 138 75.7% Separated before age 67, but didn't cash-out 408 81.2% Separated before age 67 and cashed-out 77 72.4%

Cash-out option not associated with lower rates of econ prep for retirement 32 Percent prepared: whether pension has LSD option pension had LSD option DB pension had LSD option 78.5% 79.6% No 79.3% 81.1% Yes

Separate effects of shocks and initial conditions from effects of LSD 33 Use availability of LSD in DB plans as instrumental variable. Won’t use DC plans Almost all allow cash-out

Separate effects of shocks and initial conditions from effects of LSD 34 Example for wealth. u, v correlated (say latent health) w = wealth in 2012, C = cash-out, S = a negative shock. A is the availability of a cash-out.

First stage 35  Effect of availability on frequency of cash-out: 0.0898 (0.0146)

Effect of cash-out on 2012 outcomes 36 Right-hand variables  Race  Sex  Education  Wealth quartile in 1992  Earnings quartile in 1992  Marital status in 1992  Marital status in 2012