Education about retirement affects how employees use distributions from their defined contribution pension plans. Retirement education substantially increases the probability that participants age 40 and under will save a distribution but decreases the probability that college graduates and women will save one. These important differentials are concealed by estimates of the effect of retirement education on participants generally.
Acknowledgments: Much of the work on this paper was done while I was at Michigan State University. The opinions and conclusions herein are solely mine and should not be construed as representing the opinions or policy of the Social Security Administration or Michigan State University. I am grateful to Leslie Papke, David Neumark, Jeffrey Wooldridge, and various anonymous referees for helpful comments.
As defined contribution pension plans have become increasingly common over the past two decades, so have lump sum distributions from those plans. Employees who elect such a distribution take the balance of their pension account with them when they leave a job. They can then choose to maintain the funds in accounts designated for retirement, invest them in other saving vehicles, or spend them. If spent pension distributions are not replaced by other savings, however, the future elderly are unlikely to be able to maintain a desirable standard of living. With employee-funded pensions expected to play an increasingly important role in financing Americans' retirement, saving these funds is essential.
This article is the first to examine the relationship between retirement
With an econometric model using ordinary least squares and data from the 1992 Health and Retirement Study, the analysis finds that retirement education does not affect the overall likelihood that employees will save their distributions, whether in tax-deferred or non-tax-deferred vehicles. The picture is more complicated for subgroups of employees. Attending a retirement meeting is associated with an increased likelihood of saving among persons age 40 and under but a decreased probability of saving among college graduates and women. No effect was found for men, individuals over age 40, or persons who did not graduate from college.
The finding that retirement education increases the likelihood of younger persons' saving a distribution is reassuring, for these workers are America's future retirees. However, the finding that attending a meeting does not increase saving among some of the most financially vulnerable groups is a matter of concern to policymakers. Further study of the long-term effects of spending pension distributions is needed.
As defined contribution pension plans have become increasingly common over the past two decades, so have lump sum distributions from those plans. Employees who elect such a distribution take the balance of their pension account with them when they leave a job. They can then choose to maintain the funds in accounts designated for retirement, invest them in other savings vehicles, or spend them.
Policymakers have acknowledged the increasing availability of lump sum distributions by passing tax legislation in 1986 and again in 1992 aimed at increasing the preservation of pension assets in tax-deferred accounts. Although the legislation has been somewhat successful at lowering the number of employees spending their pensions before retirement, the majority of individuals still do not put their balances into tax-deferred savings.
Several reasons for not saving distributions can be put forth. Paying off debts or meeting expenses may represent financially more attractive choices for some workers. Short-sightedness could also affect choices, particularly for young people or those with small account balances. Previous studies support either or both of these theories, as persons with lower incomes, persons with low account balances, and younger workers have been found more likely to spend their lump sum distributions.
Another reason may be that individuals simply do not have the requisite knowledge to make decisions that will maximize the usefulness of their funds. Traditional economic models of saving assume that individuals have such knowledge, or at least that they act as though they do. But retirement planning can be extremely complex and require more financial knowledge than most people have. Private financial planners realized this need decades ago. Employers are increasingly recognizing it and providing retirement education in the workplace. Even the federal government has begun a campaign to educate the public on retirement issues, with the Department of Labor taking charge of the Savings Are Vital to Everyone's Retirement Act passed by Congress in 1997.
This article examines the relationship between retirement
A sample of participants in defined contribution plans was drawn from the 1992 Health and Retirement Study (HRS). The HRS is unique in that it allows researchers to construct characteristics such as income and marital status at the time of the distribution (rather than at the time of the interview), and it gives the reason (or reasons) for leaving a job. The HRS is also a rich source of data from which researchers can construct proxy variables to control for unobservable individual tastes in saving.
This article describes previous studies of lump sum distributions and retirement education, provides an overview of the data analyzed, and presents an econometric analysis of the effect of retirement education on the lump sum distribution choice. The analysis estimates the effect of retirement education without and with control variables, then adds interaction terms to account for the differences in subgroups at risk of poverty during retirement. Possible selection bias in the model and one method of addressing that bias are also discussed.
Employer-sponsored pensions can be categorized into two broad types: defined benefit (DB) plans and defined contribution (DC) plans. DB plans are generally computed using a formula that takes into account years of service, salary, or both and were by far the most common pension plans into the 1980s. DC plans consist of an individual account for every employee into which the employee, the employer, or both may make contributions. In 1988, 19 percent of primary pension plans were DC and 65 percent were DB. By 1993, the percentage of DC plans had risen to 34 percent, and the percentage of DB plans had fallen to 49 percent (Scott and Shoven 1996).
What are the implications of this trend? Lump sum distributions under DB plans have historically been quite rare; in 1988, only 10 percent offered preretirement cashouts (Fernandez 1992).1 Although more DB plans and DB hybrid plans (that is, cash balance plans) now offer lump sum options, the percentage remains low.2 The rise in DC pension plans has increased the percentage of workers eligible for a lump sum payout. In 1988, 60 percent of participants in employer-sponsored pension plans reported that their primary retirement plan offered a lump sum option; by 1993, 72 percent of workers did (Scott and Shoven 1996).
Participants in DC pension plans often have several options for what to do with their funds when they leave a job. They may leave the balance with their former employer, transfer it to an individual retirement account (IRA) or the new employer's plan, or purchase an annuity. These uses are commonly known as rollovers or fiduciary-to-fiduciary transfers. Their other option is to cash out the distribution. In that case, the employee actually takes possession of the funds and decides whether to reinvest them in a tax-deferred vehicle such as an IRA, invest in non-tax-deferred vehicles, pay off debt, or spend the money on consumer goods.
Studies of rollovers report remarkably different rates, depending on the source of the data used, the year of the survey, and the characteristics of the sample studied. Hurd, Lillard, and Panis (1998) tabulated data from distributions received between the 1992, 1994, and 1996 waves of the HRS and found that 69 percent of job leavers who had DC plans rolled the funds over. Engelhardt (1999) used retrospective data from the 1992 HRS and found that approximately 41 percent rolled over their money. The difference in rollover rates most likely results from whether the lump sum was received before or after 1992. The conclusion that recent distributions are more likely to be rolled over than earlier ones is consistent with previous research (see Andrews 1991; Bassett, Fleming, and Rodrigues 1998).
Lump sum rollover rates are much lower in studies based on the Employee Benefit Survey, a supplement to the Current Population Survey (CPS) that was administered every fifth year until 1993 and that contains detailed pension information.3 The majority of research on use of lump sum distributions is based on these data, including studies by Poterba, Venti, and Wise (1998) and Bassett, Fleming, and Rodrigues (1998), who use the 1993 survey. Bassett, Fleming, and Rodrigues used a sample that includes both DB and DC participants who received a lump sum between 1988 and 1992; the authors found that 28 percent of those recipients rolled over their distribution. Poterba, Venti, and Wise studied DB and DC lump sum recipients from all years and reported a 24 percent rollover rate.
What might account for the large differences in rollover rates between studies based on the HRS and the CPS? One possible reason is that the HRS targets individuals between the ages of 51 and 61 in 1992, while the CPS covers individuals who were aged 18 to 65 in the interview year. Research has shown that rollover propensity increases with age (Bassett, Fleming, and Rodrigues 1998; Purcell 2000; Poterba, Venti, and Wise 1998); thus the older HRS sample may partially explain why studies based on HRS data show a higher rate.
The most likely reason for the difference, however, is the nature of the questions each survey asks regarding use of lump sums. While the HRS asks all respondents with a previous DC plan what became of the balance, the CPS excludes from further questions those respondents who left their balances with a former employer and those who annuitized their balances. Approximately 40 percent of Hurd, Lillard, and Panis's sample chose one of those two options, resulting in an underestimation of the rollover rate among all job leavers.
One pattern has been consistent with respect to lump sum rollovers: a much larger percentage of dollars than percentage of distributions is rolled over. Hurd, Lillard, and Panis found that 18 percent of DC plans were cashed out compared with only 6 percent of DC plan dollars. Yakoboski (1999) observed the same pattern when examining 1995 income tax data. Although only 34 percent of the 5.6 million tax filers who received a lump sum in 1995 rolled over their distribution into an IRA, 77 percent of lump sum dollars were rolled over.
It matters not only how many individuals are spending their lump sums, but who is doing the spending. Most lump sum analysis concludes that younger workers, lower earners, and persons with smaller distributions are less likely to roll distributions over (Bassett, Fleming, and Rodrigues 1998; Purcell 2000; Poterba, Venti, and Wise 1998). Workers with less than a college education also tend to cash out their distributions (Bassett, Fleming, and Rodrigues 1998; Poterba, Venti, and Wise 1998), and women have been found to have greater cashout propensities than men (Scott and Shoven 1996).
Why are these findings important? Low earners and the less educated have been found to have less potential for future wage growth (Korczyk 1996), increasing the chance that spent lump sums will have a negative impact on their financial well-being in retirement. In addition, households headed by divorced or widowed women in their 50s and 60s have approximately two-thirds the median net worth of similar households headed by men (Lupton and Smith 1999);4 spending lump sums may only worsen this situation. Furthermore, Gale (1998) finds that younger individuals, low earners, and those with less wealth are unlikely to substitute pension wealth for other savings. The same people who are spending their lump sums are those for whom a pension would have been most likely to represent new wealth.
In some individual cases, spending a pension distribution may be the financially optimal thing to do. However, public policy must address the possibility of inadequate retirement security for future generations. Some tax legislation has already been enacted to curb cashouts, but the potential of retirement education to affect decisions about the use of lump sums needs to be explored further.
Government policies aimed at preserving lump sum distributions have predominantly taken the form of tax disincentives. The Tax Reform Act of 1986 contains the first changes in the tax code to address pension distributions. That act imposes a 10 percent penalty on distributions for persons under age 59½ if the distribution is not reinvested in a tax-deferred retirement vehicle within 60 days of receipt.5 In 1992, Congress added the Unemployment Compensation Amendments Act, which mandates that employers withhold 20 percent of the lump sum balance for federal income tax if the balance is not transferred directly into another tax-deferred account upon the employee's leaving the job.
Because portable pensions (such as DC plans) are a relatively recent phenomenon, few studies have examined the effects of tax legislation on them. Chang (1996) looked at the effects of the 10 percent tax penalty and estimated that it increases the probability of a pension distribution's being rolled over by 4 percent for high-income groups (those with annual incomes greater than $39,999). The penalty has no statistically significant effect on low-income groups, particularly when members are under 55 years of age. Scott and Shoven (1996) also documented differences in rollovers by income. For persons earning more than $30,000 annually, the propensity to cash out declined between 1983 and 1988 and continued downward from 1988 to 1993. For those with incomes at or below $30,000, the cashout propensity declined from 1983 to 1988 but rose from 1988 to 1993. Thus, the tax penalty may stem cashouts among high-income groups, but workers with lower incomes still fail to roll over their distributions.
Purcell (2000) used the 1993 Survey of Income and Program Participation (SIPP) to estimate the effects of the 1992 amendments. He found that individuals who took distributions after 1992 were 16 percent more likely to roll them over than those who took lump sums between 1986 and 1993.6 However, the study did not differentiate between recipients who were under or over the effective age of the 10 percent
In sum, limited evidence suggests that tax legislation has decreased cashouts of lump sums, especially for those with higher incomes. However, if lack of financial knowledge plays a large role in recipients' decisions, then educating workers about retirement issues may affect behavior in a way that tax legislation has been unable to do.
Most Americans demonstrate a clear need for financial guidance. Only 33 percent of surveyed adults understand the basics of compound interest, and 42 percent do not know why federally insured certificates of deposit have a lower rate of return than privately held mutual funds (Bernheim 1998). Most people are also uninformed about retirement planning. Results from the 1997 Retirement Confidence Survey (EBRI 1997) show that only 36 percent of workers have tried to determine how much they will need to save for retirement. Of these individuals, 24 percent cannot provide an actual figure (EBRI 1997).
An informed decision about the use of pension distributions requires knowledge about one's pension plan, how much income is needed for retirement, and the advantages of compound interest, among other things. With more knowledge about financial matters and retirement, would workers make different spending and saving decisions than they do now? Evidence suggests that they would.
A college education appears to increase general economic literacy and to help develop the skills needed to process financial information. Bernheim and Scholz (1992) have found that the average college-educated person is likely to engage in more sophisticated financial planning than the average person without a degree and is likely to save more adequately for retirement.
Studies also show that retirement
The availability of retirement education, like that of pension distributions, has grown remarkably in the past 20 years. Although private financial planners have been in business for many years, substantially more community colleges and workplaces began to offer retirement education in the 1980s and 1990s. By 1994, 88 percent of large employers offered financial education; two-thirds of those programs were added after 1990 (Pensions and Investments 1995).
Retirement education takes many forms. Some firms use only written materials such as brochures and pamphlets, and others offer workshops and seminars, Internet work sites, or one-on-one financial advising. In 1993, approximately 65 percent of pension plan sponsors provided newsletters, and 44 percent offered seminars to all workers (Bayer, Bernheim, and Scholz 1996).
Retirement education includes a variety of topics. In 1995, nearly all employer-sponsored programs covered asset allocation, and 95 percent explained risk and risk tolerance. Eighty-eight percent discussed basic investment terminology and explained the characteristics of the pension plan, and 73 percent showed employees how to calculate income for retirement. But only 39 percent specifically addressed the impact of spending pension distributions before retirement (Milne, VanDerhei, and Yakoboski 1995).
What exactly constitutes "retirement education" in the workplace can be fuzzy for many employers. Because most DC plans offer participants a choice of options for investing their pension balances, employees often look to employers for advice on how best to allocate their assets. Advising employees is risky,
Not until the early 1990s did the government provide clear guidelines for employers structuring a retirement education program. In 1992, the Department of Labor finalized section
The 1992 HRS was the first wave of an ongoing survey of 12,057 men and women, most of them between the ages of 51 and 61 in 1992.11 In addition to standard demographic and financial questions, the survey includes questions related specifically to retirement. Detailed pension information and expectations about retirement provide a rich source of data for researchers analyzing retirement issues.
Since the present analysis is concerned with how retirement education affects employees' use of pension distributions, it includes only the 938 HRS respondents who participated in a DC plan in a previous job.12 Moreover, since questions about retirement education were asked only in 1992, subsequent waves of the HRS are not included.
Of the HRS respondents who received a distribution, 640 answered the question about attendance at a retirement meeting and indicated the kind of saving vehicle in which they invested their distribution.13 Table 1 reports summary statistics for this group. Nineteen percent of the 640 reported having attended a meeting; of that group, 72 percent (or 14 percent of the total sample) attended a meeting sponsored by either their employer or their spouse's employer. The mean age at which a distribution was received was 49, the average distribution was $33,797 (in 1993 dollars), and the average year of receipt was 1985.14
Variable | Mean (N=640) |
Standard deviation |
---|---|---|
Attended a retirement meeting | 19 | 39 |
Attended a retirement meeting sponsored by employer | 14 | 45 |
Female | 49 | 50 |
Black/other | 22 | 41 |
College degree | 25 | 43 |
Married | 75 | 44 |
Age 40 or under | 15 | 36 |
Family annual earnings over $35,000 (1993 dollars) | 59 | 49 |
Left job, family problems | 12 | 32 |
Left job, involuntary leave | 29 | 45 |
Left job, disabled | 13 | 34 |
Left job, retired | 17 | 38 |
Left job voluntarily | 28 | 45 |
At least 50 percent chance of living to age 75 | 35 | 48 |
Expects to leave large inheritance | 47 | 50 |
Does not think at all about retirement | 30 | 46 |
Short saving horizon (few months to 1 year) | 25 | 44 |
Medium saving horizon (few years to 10 years) | 64 | 48 |
Long saving horizon (over 10 years) | 11 | 31 |
Risk averse | 71 | 43 |
Age (years) | 49 | 8.5 |
Year left job | 1985 | 6.4 |
Family earnings at time of distribution (1993 dollars) | 50,247 | 53,047 |
Amount of distribution | 33,797 | 81,147 |
Number of dependents | 1.5 | 1.1 |
Total net worth | 295,039 | 687,818 |
SOURCE: Author's tabulations from the 1992 Health and Retirement Study. | ||
NOTES: Variables for marital status, age, earnings, and amount of distribution are given as of the time the respondent left his or her job; other variables are given as of the time of the interview. |
The HRS asks all respondents if they have worked at least 5 years at a previous job. Those who have are asked whether that job had an employer-sponsored pension plan and whether the plan was a DB plan, a DC plan, or had characteristics of both. Because only a small percentage of DB plan participants are given the choice of whether to take a distribution, and lump sum eligibility is not reported for previous jobs, only those with DC plans are included in this analysis.15,16
The HRS then asks each respondent what he or she did with the pension distribution upon job separation. Options included leaving it with the former employer to accumulate, rolling it directly into an IRA, rolling it into a new employer's pension plan, converting it to an annuity, or cashing out the balance.17 For those who elected to cash out the distribution, the use of the distribution is recorded. Choices included spending it, saving or investing it in general saving vehicles or paying off debt, or investing it in an IRA. Although the survey provides for more than one use of the distribution, no respondents in the sample chose more than one.
Two definitions of saving are used in the present analysis. The broader definition includes putting the distribution in either a tax-deferred (retirement) or a non-tax-deferred (general saving) vehicle or paying off debt.18 A general saving vehicle is one that is not tax-deferred, including (but not limited to) stocks, bonds, certificates of deposit, and bank savings accounts. This broader definition is referred to as all types of saving. The narrower definition includes only tax-deferred saving and is referred to as retirement saving. The broader definition of saving is included in the analysis because, all else being equal, investing in non-tax-deferred assets does increase the resources available for retirement.
Uses of the distribution are shown in Table 2. The table includes everyone who got a distribution except those who did not answer the retirement education question or who answered "don't know" to the question regarding use of the distribution.19 Two points are worth noting. First, just under one-third of the sample chose to leave their balance with their former employer or to buy an annuity. Second, the percentage of dollars
Use of pension | Distributions (N=778) |
Dollars (N=566) |
---|---|---|
Saved in all types of vehicles | 58 | 78 |
Retirement saving vehicles | ||
Rolled over/invested in an IRA | 18 | 33 |
Transferred to new employer | 2 | 4 |
Left in old employer's account | 25 | 26 |
Invested in an annuity | 5 | 11 |
General saving vehicles | ||
Saved or invested in general saving vehicles | 5 | 3 |
Paid down debt | 3 | 1 |
Saved in retirement vehicles only | 50 | 74 |
Took cash lump sum a | 45 | 24 |
Spent | 25 | 14 |
Categories unable to classify | ||
Took cash/unidentified use | 12 | 6 |
Other use | 1 | 2 |
Lost pension/pension in litigation/traded pension rights for other compensation | 4 | b |
SOURCE: Author's tabulations from the 1992 Health and Retirement Study. | ||
NOTES: Number of respondents in the column for distributions is greater than the number in the column for dollars because of missing dollar amounts. | ||
a. Includes the percentages under general saving vehicles, paying down debt, spent, and took cash/unidentified use. | ||
b. Less than $1. |
The HRS is the only public source of data that contains information on both retirement education and pension distributions. All respondents are asked two questions about retirement education: have they ever attended any meetings on retirement or retirement planning; if so, did their own or their spouse's employer organize the meeting?
The percentage of DC participants who attended a retirement meeting is reported in Table 3 by age, education, sex, family earnings at the time of job separation, and amount of the distribution.21 Previous studies of distributions have found those five characteristics to be correlated with the likelihood of lump sum rollover.
Characteristic | Attended a retirement meeting |
Saved in all types of vehicles |
Saved in retirement vehicles only |
---|---|---|---|
All respondents | 19 | 69 | 60 |
Age a | |||
40 and under | 14 | 58 | 36 |
Older than 40 | 20 | 71 | 64 |
College degree | 30 | 80 | 74 |
No college degree | 15 | 66 | 56 |
Women | 18 | 63 | 51 |
Men | 20 | 75 | 69 |
Family annual earnings a (1993 dollars) | |||
$35,000 or less | 17 | 58 | 47 |
Over $35,000 | 20 | 77 | 69 |
Amount of distribution (1993 dollars) | |||
$4,000 or less | 16 | 38 | 27 |
$4,001-$12,000 | 18 | 62 | 50 |
$12,001-$30,000 | 20 | 69 | 55 |
Over $30,000 | 26 | 83 | 79 |
Observations | 640 | 640 | 640 |
SOURCE: Author's tabulations from the 1992 Health and Retirement Study. | |||
a. Age and family earnings are for the year of job separation. |
Looking at these groups, a pattern
A linear probability model using ordinary least squares sheds further light on the relationship between attending a retirement meeting and lump sum use.22 The model is as follows (omitting individual subscripts):
Variable | All types of saving | Retirement saving only | ||||||
---|---|---|---|---|---|---|---|---|
Mean | Mean plus control variables |
Mean plus control and proxy variables |
Mean plus control variables and interaction terms |
Mean | Mean plus control variables |
Mean plus control and proxy variables |
Mean plus control variables and interaction terms |
|
Attended a retirement meeting | 0.05 (0.05) |
-0.04 (0.06) |
-0.04 (0.06) |
0.07 (0.10) |
0.04 (0.05) |
-0.07 (0.05) |
-0.07 (0.06) |
0.09 (0.09) |
Female | -0.06 (0.05) |
-0.07 (0.05) |
-0.03 (0.05) |
-0.09 ** (0.05) |
-0.11 ** (0.05) |
-0.06 (0.05) |
||
Black/other | -0.10 (0.06) |
-0.11 (0.07) |
-0.10 (0.06) |
-0.13 ** (0.06) |
-0.15 ** (0.06) |
-0.14 ** (0.06) |
||
College degree | 0.13 ** (0.05) |
0.12 ** (0.05) |
0.19 ** (0.06) |
0.20 ** (0.05) |
0.19 ** (0.06) |
0.25 ** (0.06) |
||
Married | -0.03 (0.06) |
-0.03 (0.06) |
-0.04 (0.06) |
-0.02 (0.06) |
-0.01 (0.06) |
-0.02 (0.06) |
||
Amount of distribution a | 0.005 ** (0.002) |
0.005 ** (0.002) |
0.005 ** (0.002) |
0.006 ** (0.002) |
0.005 ** (0.002) |
0.005 ** (0.002) |
||
Age 40 or under | -0.02 (0.10) |
-0.05 (0.10) |
-0.08 (0.10) |
-0.15 (0.10) |
-0.16 * (0.10) |
-0.16 (0.10) |
||
Family annual earnings over $35,000 | 0.16 ** (0.05) |
0.12 ** (0.05) |
0.16 ** (0.05) |
0.18 ** (0.05) |
0.15 ** (0.05) |
0.18 ** (0.05) |
||
Number of dependents | -0.01 (0.02) |
-0.01 (0.02) |
-0.02 (0.02) |
-0.03 (0.02) |
-0.04 * (0.02) |
-0.03 (0.02) |
||
Left job involuntarily | -0.02 (0.06) |
-0.008 (0.06) |
-0.03 (0.06) |
0.002 (0.06) |
0.02 (0.06) |
0.0006 (0.06) |
||
Left job, disabled | -0.20 ** (0.08) |
-0.13 (0.08) |
-0.19 ** (0.08) |
-0.03 (0.08) |
0.03 (0.08) |
-0.02 (0.08) |
||
Left job, retired | -0.05 (0.07) |
-0.06 (0.08) |
-0.04 (0.07) |
0.01 (0.07) |
0.02 (0.08) |
0.02 (0.07) |
||
Left job, family problems | -0.13 (0.09) |
-0.15 * (0.08) |
-0.12 (0.08) |
-0.08 (0.08) |
-0.09 (0.08) |
-0.08 (0.08) |
||
Retirement meeting × college degree | -0.20 * (0.11) |
-0.19 * (0.11) |
||||||
Retirement meeting × age 40 and under | 0.34 * (0.18) |
-0.02 (0.19) |
||||||
Retirement meeting × female | -0.15 (0.11) |
-0.20 * (0.11) |
||||||
Total net worth | 0.0001 (0.0003) |
-0.000001 (0.00003) |
||||||
Expects to leave large inheritance | 0.01 (0.05) |
0.05 (0.05) |
||||||
At least 50 percent chance of living to age 75 | 0.13 ** (0.05) |
0.07 (0.05) |
||||||
Saving horizon |
0.09 * (0.06) |
0.04 (0.05) |
||||||
Saving horizon more than 10 years | 0.01 (0.08) |
0.03 (0.08) |
||||||
Risk averse | 0.06 (0.07) |
0.10 (0.07) |
||||||
Constant | 0.68 ** (0.02) |
1.13 ** (0.16) |
1.13 ** (0.18) |
0.76 ** (0.20) |
0.59 ** (0.02) |
1.24 ** (0.16) |
1.10 ** (0.19) |
1.07 ** (0.23) |
R-squared | 0.002 | 0.19 | 0.21 | 0.20 | 0.001 | 0.27 | 0.29 | 0.28 |
Observations | 640 | 459 | 447 | 459 | 640 | 459 | 447 | 459 |
SOURCE: 1992 Health and Retirement Study. | ||||||||
NOTES: Variables for total net worth and amount of distribution are in tens of thousands of 1993 dollars. Omitted dummy variables are left job voluntarily and saving horizon less than a year. Year dummy variables for the year of the distribution are included in all columns except for the two for the mean only.
Robust standard errors are adjusted for cluster correlation within families and are in parentheses.
** Significant at 5 percent level. * Significant at 10 percent level. |
||||||||
a. In tens of thousands of 1993 dollars. |
One set of variables included in X merits
The model is first estimated without interaction terms or proxy variables; the results for all types of saving and for retirement saving only are presented in Table 4.27 Attending a retirement meeting leads to a 5 percent greater likelihood of saving a distribution in all types of saving and a 4 percent greater probability of saving in retirement vehicles only. Neither result is statistically significant, however. After adding the control variables in X, attendance at a retirement meeting exerts a small, negative effect on both types of saving.28 Both estimates remain statistically insignificant.29
The estimated effects of the control variables in Table 4 are qualitatively similar to those in previous pension distribution research. Recipients of larger distributions are more likely to save them (at a rate of 0.5 percent to 0.6 percent per $10,000 in the pension account), regardless of the definition of saving used. Recipients who graduated from college save their distributions 13 percent more often than nongraduates in all types of saving vehicles, and 20 percent more often in retirement vehicles. Those with family earnings over $35,000 at the time of job separation save their distributions more often than families with lower earnings: 16 percent for all types of saving and 18 percent for retirement saving only.
One interesting result lies in the reason for leaving a job. Those who left their job because of disability or poor health are 20 percent less likely to save their distribution in any type of vehicle than those who left voluntarily (significant at less than the 5 percent level). The number who left because of disability or poor health and who invested their distribution in retirement saving is much smaller in magnitude and is statistically insignificant. None of the other reasons for leaving a job affects the choice to save a distribution in retirement vehicles.30
Leaving a job because of poor health is a situation over which the individual has little control. It is also a situation in which the immediate need for
Thus far, retirement education appears to have no effect on lump sum saving. The HRS study design may influence this result, however. The survey does not collect data on the year in which individuals attended the retirement meeting, only the year in which they left their job. Thus, some workers could have attended the meeting after deciding how to use their distribution. If so, then the coefficient estimate on the retirement meeting variable does not measure what is intended in this
In order to investigate this possibility, a subgroup of 159 individuals, none of them working at the time of the HRS interview, was identified.32 Eighty percent of persons in this nonworking subgroup who said they had gone to a retirement meeting attended one sponsored by an employer. Since these persons did not have a current job but attended the meeting of an employer, they must have gone to the meeting before they received their distribution.33 With this fact in mind, the model was then reestimated using this nonworking subgroup and breaking the sample into three groups: those who attended an employer-sponsored meeting, those who attended a non-employer-sponsored meeting, and those who did not attend a meeting at all. The equation was then reestimated for the full sample, and the results were compared.34
The results are reported in Table 5. Individuals in both groups are 6 percent less likely to save their distributions in all types of saving if they attended an employer-sponsored meeting. The full sample is 9 percent less likely to put their lump sum in a retirement saving vehicle, and the group not working is 5 percent less likely. Although the estimates are statistically insignificant, the similarity of the estimates from the two samples suggests that lack of information on when recipients attended a meeting is not driving the overall results.
Dependent variable (All types of saving) | Full sample | Currently not working | ||
---|---|---|---|---|
All types of saving |
Retirement saving only |
All types of saving |
Retirement saving only |
|
Attended an employer-sponsored retirement meeting | -0.06 (0.07) |
-0.09 (0.06) |
-0.06 (0.10) |
-0.05 (0.10) |
Attended a non-employer-sponsored retirement meeting | 0.02 (0.07) |
-0.02 (0.09) |
0.07 (0.14) |
0.08 (0.15) |
Female | -0.06 (0.05) |
-0.09 ** (0.05) |
-0.13 (0.08) |
-0.13 (0.08) |
Black/other | -0.10 (0.06) |
-0.13 ** (0.06) |
-0.10 (0.10) |
-0.07 (0.10) |
College degree | 0.13 ** (0.05) |
0.20 ** (0.05) |
0.18 * (0.11) |
0.19 * (0.11) |
Married | -0.03 (0.06) |
-0.01 (0.06) |
-0.009 (0.10) |
0.03 (0.10) |
Amount of distribution a | 0.005 ** (0.002) |
0.005 ** (0.002) |
0.009 ** (0.004) |
0.009 ** (0.004) |
Age 40 and under | -0.02 (0.10) |
-0.15 (0.10) |
0.40 (0.48) |
0.39 (0.48) |
Family annual earnings over $35,000 (1993 dollars) | 0.15 ** (0.05) |
0.17 ** (0.05) |
0.21 ** (0.09) |
0.23 ** (0.09) |
Number of dependents | -0.01 (0.02) |
-0.03 (0.02) |
-0.02 (0.04) |
-0.01 (0.04) |
Left job involuntarily | -0.02 (0.06) |
0.005 (0.06) |
0.08 (0.17) |
0.09 (0.17) |
Left job, disabled | -0.19 ** (0.08) |
-0.03 (0.08) |
0.15 (0.17) |
0.17 (0.17) |
Left job, retired | -0.04 (0.07) |
0.02 (0.07) |
0.19 (0.16) |
0.19 (0.16) |
Left job, family problems | -0.13 (0.09) |
-0.08 (0.08) |
-0.22 (0.17) |
-0.20 (0.18) |
Constant | 0.93 ** (0.17) |
1.00 ** (0.17) |
1.08 ** (0.26) |
1.00 ** (0.26) |
R-squared | 0.19 | 0.27 | 0.33 | 0.33 |
Observations | 459 | 459 | 165 | 165 |
SOURCE: 1992 Health and Retirement Study. | ||||
NOTES: Omitted variables are did not attend a meeting and left job voluntarily. Year dummy variables for the year of the distribution are included in all specifications. Marital status, age, and family earnings are for the year of job separation. All other variables were recorded as of the year of the interview.
Robust standard errors are adjusted for cluster correlation within families and are in parentheses.
** Significant at the 5 percent level. * Significant at the 10 percent level. |
||||
a. In tens of thousands of 1993 dollars. |
The decision to attend a retirement meeting may be motivated by the same unobserved saving tastes that affect the decision to save a pension distribution. In fact, Bernheim and Garrett (1996) test the hypothesis that attending a retirement meeting is correlated with unobserved saving tastes. They conclude that persons with a lower propensity for saving are more likely to be offered retirement education in the workplace and to take advantage of it. If this is in fact the case, then the coefficient of R in the model used in this analysis is underestimated, and all parameter estimates are biased and inconsistent.
The preferred method for addressing this issue is instrumental variable estimation; however, since no appropriate instrument is readily available, and the HRS is a rich source of proxy variables, proxy variables are used to control for unobserved tastes.35 The vector, P, contains these proxies.
Hurd, Lillard, and Panis (1998) have developed a theoretical framework for choosing relevant proxy variables. By extending a version of a life cycle model (Hurd 1989, 1990, 1999) to include pension distributions specifically, they identify specific saving characteristics that may affect the lump sum saving choice. The following paragraphs include brief descriptions of the proxy variables used in the present
Bequest intent is measured with a binary variable that equals one if the respondent intends to leave a large bequest, zero otherwise. Expectations about mortality are captured in a binary variable constructed from the respondent's rating of the likelihood that he or she will live to age 75;37 the variable equals one if the respondent thinks there is at least a 50 percent chance of living to age 75. The fact that this variable is based on the respondent's own assessment of longevity (rather than on estimates from standard longevity tables) is important because it affects his or her rate of future discount. Persons who expect a shorter
The HRS asks respondents what planning period they look to when deciding how much to save. The present analysis groups their responses into three time periods: a few months to a year, a few years to 10 years, and more than 10 years. Individuals with shorter planning horizons may be less likely to plan for retirement, hence decreasing the likelihood of their rolling over distributions. Uncertainty about the future and liquidity constraints are controlled for by a continuous variable for total net worth, measured in 1993 dollars.39 Those with lower net worth have fewer private resources for retirement and may be more uncertain of their future financial security. In addition, lower net worth may mean more debt, resulting in a lower likelihood of securing future credit.
To control for risk aversion, the analysis constructs a binary variable that equals one if the individual is averse to risk and zero otherwise.40 Risk-averse individuals may be more likely to save their distributions to guard against uncertain events, particularly those in old age.
Even after adding the proxy variables, the retirement meeting coefficient estimate does not change and remains statistically insignificant (Table 4). If the proxy variables adequately account for unobserved factors that affect both attendance at a retirement meeting and the likelihood of saving lump sums, then these results suggest that estimates of the retirement education coefficient are not biased by respondents' self-selection into retirement meetings.
What do these results say in light of Bernheim and Garrett's (1996) finding that those with a lower taste for saving tend to go to retirement education meetings? One explanation is that there is actually no self-selection into retirement meetings at all, or that the motivation for attending a meeting is so varied that the addition of the proxies does not affect the estimate in any particular direction. For instance, those with a lower taste for saving (who tend to have less financial knowledge) may use retirement education more often because they want to acquire the knowledge needed to make complex retirement decisions. This explanation supports Bernheim and Garrett's conclusion that individuals with lower tastes for saving are more likely to use retirement education. However, it is also likely that those with a higher taste for saving would be more likely to attend because they are interested in saving and financial issues.
Both of these assumptions could be correct, depending on such things as the quality and content of the retirement meeting, as well as the difficulty of the material presented. The time of day at which the meetings are offered may also play a role in who attends. If offered during work hours, those with a more flexible schedule may be able to get away, while those with a fixed or busy schedule may not be able to attend. The point is that the reasons for attending a meeting may vary widely, so it is quite possible that the addition of the proxy variables should not affect the retirement education estimate.
Alternatively, it is possible that selection bias does exist and that Bernheim and Garrett's proxy variables are better suited to pick it up than the proxy variables in the
Finally, individuals may react differently to retirement education with respect to lump sums than they do to saving in general.42 This possibility is addressed further in the next section.
The previous section discusses how heterogeneity among retirement meetings may have an effect on the results of this analysis. But another type of heterogeneity may also be driving the negative, statistically insignificant effects seen in Table 4. Research shows that retirement education may affect different types of people in different ways. For instance, a 1993 study by EBRI and Matthew Greenwald and Associates found that the effect of retirement education on employee contributions to pension plans may vary with the employee's education (Milne, VanDerhei, and Yakoboski 1995). Of workers who read educational material or attended seminars, 41 percent without a college degree reported that the seminars led them to increase the amount of their contributions to their pension plan, compared with 30 percent of college graduates (Milne, VanDerhei, and Yakoboski 1995).
In order to test the possibility that different types of individuals may not react similarly to retirement education, the model was estimated to include the retirement education variable interacted with the variables age 40 and under, have a college degree, and women.43
The results are shown in Table 6.44 Workers age 40 and under have a 27 percent higher probability of saving their distribution in all types of saving if they attended a meeting, but there is no difference by age with respect to investment in retirement vehicles only.45
These results are not surprising. Younger people, many of whom are not yet planning seriously for retirement, attend a retirement meeting and realize the importance of saving for retirement. But because tax-deferred vehicles offer little liquidity, such workers are more likely to save their distributions in all types of saving vehicles. Estimates show no effect of retirement meetings on the saving of distributions for workers over age 40.Group | All types of saving |
Retirement saving only |
---|---|---|
All respondents | -0.04 (0.06) |
-0.07 (0.05) |
Age 40 and under | 0.27 * (0.16) |
-0.08 (0.19) |
Over age 40 | -0.06 (0.06) |
-0.05 (0.06) |
College degree | -0.15 * (0.09) |
-0.19 ** (0.08) |
No college degree | 0.04 (0.07) |
-0.008 (0.07) |
Women | -0.09 (0.08) |
-0.16 ** (0.08) |
Men | 0.06 (0.08) |
0.04 (0.08) |
Observations | 459 | 459 |
SOURCE: 1992 Health and Retirement Study. | ||
NOTES: Robust standard errors are adjusted for cluster correlation within families and are in parentheses.
** Significant at the 5 percent level. * Significant at the 10 percent level. |
College graduates who attend a meeting are 15 percent to 19 percent less likely to save their distributions than college graduates who do not attend a meeting, depending on the definition of saving used. Retirement education shows no effect on the use of a pension distribution by nongraduates. The negative effect on college graduates seems counterintuitive, especially considering evidence that retirement education has a small positive effect on flow savings and net wealth measures (Bernheim and Garrett 1996). If the analysis had found that college graduates experience a smaller positive effect of retirement education than nongraduates, the finding would seem to follow the evidence showing that college graduates possess more financial knowledge and hence might gain less from a retirement meeting. However, the fact that retirement education exerts a negative effect means that college-educated individuals are actually more likely to spend their distribution after attending a meeting.
Perhaps an explanation lies in the difference between deciding to save a pension distribution and to save in general. As noted earlier, the most widely offered topics in retirement education are a description of the pension plan and an estimation of the income needed for retirement. The impact of lump sum consumption on retirement income is the least frequently covered topic (Milne, VanDerhei, and Yakoboski 1995). Because consumption of pension distributions has become a matter of concern only recently, retirement meetings in the 1980s or early 1990s were even less likely to have covered the importance of pension preservation in their educational material.
A recent study shows how workers may react to knowledge gained from retirement education (Milne, VanDerhei, and Yakoboski 1995). In it, employees whose education included an explanation of the company pension plan (40 percent) and the impact of preretirement withdrawals (38 percent) had two of the lowest average equity holdings of any group of employees attending a meeting. The study authors propose that upon learning their distributions are available before retirement, employees treated the funds more like a short-term investment and decreased the aggressiveness of their holdings. Similarly, since the traditional DB plans generally did not offer lump sums, employees who learn through retirement education that they have access to their DC balance before retirement may also decide to spend their distribution upon job separation.
This theory may explain why just any individual chooses to spend his or her pension after attending a meeting, but it does not explain why college graduates in particular are more inclined to spend lump sum distributions. Another factor may be involved. Evidence shows that financially knowledgeable individuals are more likely to have retirement savings outside of Social Security and employer pensions (Milne, VanDerhei, and Yakoboski 1996).46 Moreover, as noted earlier, college graduates tend to be more financially knowledgeable than nongraduates. Hence, college graduates should have more private savings set aside than nongraduates do. With calculating retirement income and a description of the pension plan being the two most common topics covered in retirement education, college graduates may find that they have overestimated their income needs and do not need to save a pension distribution. With additional private savings set aside, college graduates may be more likely to feel that they can afford to spend their distributions than can the less wealthy, non-college graduates.
Women were also more likely to spend their distribution if they attended a meeting (Table 6). Attendees were 16 percent less likely to put their distribution into retirement vehicles, and no more or less likely to put it in all types of saving. Men did not use their distribution differently if they attended a meeting, regardless of which definition of saving is used. The negative effect for women is logical, given that many women, especially those who were aged 51 to 61 in 1992, are often the secondary earners in a household. These women may not consider preservation of their lump sum to be of primary importance, and learning that they can spend the money may increase the likelihood that they will do so.47
This analysis is the first one to evaluate a means other than tax legislation for addressing the consumption of pension distributions. It shows that retirement education substantially increases the probability that persons age 40 and under will save a lump sum distribution but decreases the probability that college graduates and women will save it. These important differentials are concealed by estimates of the effect of retirement education on recipients generally.
The findings do not necessarily contradict Bernheim and Garrett's (1996) conclusion that retirement education has a positive effect on saving behavior. Rather, the results of this analysis suggest that retirement meetings may inform college-educated individuals that they have the option of spending a distribution or give them financial information about their retirement needs that will affect their decision. If this is the case, policymakers should not be terribly concerned about these particular effects of retirement education, since college-educated individuals are likely to be saving enough for retirement in the first place.
However, policymakers should be very concerned that retirement education does not increase the likelihood that financially vulnerable
Variable | All types of saving |
Retirement saving only |
---|---|---|
Attended a retirement meeting | -0.03 (0.06) |
-0.08 (0.07) |
Female | -0.06 (0.05) |
-0.12 ** (0.06) |
Black/other | -0.11 * (0.06) |
-0.16 ** (0.07) |
College degree | 0.14 ** (0.06) |
0.24 ** (0.06) |
Married | -0.03 (0.06) |
-0.03 (0.06) |
Amount of distribution a | 0.02 * (0.01) |
0.03 ** (0.01) |
Age 40 and under | -0.03 (0.05) |
-0.18 (0.11) |
Family annual earnings over $35,000 (1993 dollars) | 0.15 ** (0.05) |
0.20 ** (0.06) |
Number of dependents | -0.01 (0.02) |
-0.03 (0.02) |
Left job involuntarily | -0.03 (0.07) |
-0.02 (0.07) |
Left job, disabled | -0.21 ** (0.08) |
-0.02 (0.09) |
Left job, retired | -0.09 (0.09) |
-0.03 (0.09) |
Left job, family problems | -0.14 (0.09) |
-0.09 (0.10) |
Pseudo R-squared | 0.15 | 0.22 |
Log likelihood | -253.7 | -239.4 |
Observations | 450 | 444 |
SOURCE: 1992 Health and Retirement Study. | ||
NOTES: Columns correspond to the ordinary least squares specifications in Table 4. Omitted dummy variable is left job voluntarily. Marital status, age, and family earnings are for the year of job separation. All other variables were recorded as of the year of the interview. Year dummy variables for year of distribution are included in both specifications.
Robust standard errors are adjusted for cluster correlation within families and are in parentheses.
** Significant at the 5 percent level. * Significant at the 10 percent level. |
||
a. In tens of thousands of 1993 dollars. |