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Sink-or-Swim Retirement Plans

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Abstract

People’s exposure to both labor and financial market risks has increased since the 1980s, while labor and financial markets have also become more unstable. The combination of growing risk exposure and rising risks has contributed to increasing wealth inequality, as households with high risk exposure have experienced lower wealth gains over time than households without high risk exposure. In this chapter, I focus on some of the mechanics of rising financial risk exposure with individualized savings, such as retirement savings accounts and housing.

Keywords

Housing Market Risk Exposure Retirement Plan Retirement Saving Define Contribution 
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Notes

  1. 5.
    For a review of the relevant literature, see Stefano DellaVigna, “Psychology and Economics: Evidence from the Field,” Journal of Economic Literature 47, no. 2 (June 2009), 315–372;CrossRefGoogle Scholar
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  3. 6.
    See, for instance, Christian Weller, “Did Retirees Save Enough to Compensate for the Increase in Individual Risk Exposure?” Journal of Aging and Social Policy 22, no. 2 (2010), 152–171.CrossRefGoogle Scholar
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    See also Jacob S. Hacker, The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream (New York, NY: Oxford University Press, 2008).Google Scholar
  5. 13.
    Pension funding depends on the employers’ assumptions of future interest rates they can earn on their DB pension plans. These interest rates are regulated by PPA. Interest rates tend to fall and thus pension contributions tend to rise during recessions, when companies can least afford the added costs. For a discussion of the link between macroeconomic cycles and interest rates, see Christian Weller and Dean Baker, “Smoothing the Waves of Pension Funding: Could Changes in Funding Rules Help Avoid Cyclical Under-funding?” The Journal of Policy Reform 8, no. 2 (June 2005), 131–151.CrossRefGoogle Scholar
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    See, for example, Robert M. Dunsky and James R. Follain, “Tax-Induced Portfolio Reshuffling: The Case of the Mortgage Interest Deduction,” Real Estate Economics 28, no. 4 (2000), 683–718;CrossRefGoogle Scholar
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  10. 28.
    Robert J. Shiller, “Historic Turning Points in Real Estate,” Eastern Economic Journal 34, no 1 (Winter 2008), 1–13. Housing market swings tend to be a little shorter, typically taking about a decade to go through a boom and bust cycle.CrossRefGoogle Scholar
  11. 29.
    Regina T. Jefferson, “Rethinking the Risk of Defined Contribution Plans,” Florida Tax Review 4, no. 9 (2000), 607–683;Google Scholar
  12. Marie-Eve Lachance, Olivia S. Mitchell, and Kent Smetters, “Guaranteeing Defined Contribution Pensions: The Option to Buy Back a Defined Benefit Promise,” Journal of Risk and Insurance 40, no. 1 (2003), 1–16, doi: 10.1111/1539–6975.00044.CrossRefGoogle Scholar
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    Shlomo Benartzi, Alessandro Previtero, and Richard H. Thaler, “Annuitization Puzzles,” The Journal of Economic Perspectives 25, no. 4 (Fall 2011), 149–164;CrossRefGoogle Scholar
  14. US Government Accountability Office (GAO), “Retirement Income, Ensuring Income throughout Retirement Requires Difficult Choices,” GAO-11–400 (Washington, DC: GAO, June 2011), 7.Google Scholar

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© Christian E. Weller 2016

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