State and Local Pension Plans Number 21, October 2011 COMPARING WEALTH IN RETIREMENT: STATE-LOCAL VERSUS PRIVATE SECTOR WORKERS By Alicia H. Munnell, Jean-Pierre Aubry, Joshua Hurwitz, and Laura Quinby* * Alicia H. Munnell is the Peter F. Drucker Proessor oManagement Sciences in Boston College’s Carroll School oManagement and director othe Center or Retirement Research at Boston College (CRR). Jean-Pierre Aubry is the assistantdirector ostate and local research at the CRR. Josh Hurwitz and Laura Quinby are research associates at the CRR. The au- thors would like to thank Andrew Biggs, David Blitzstein, Keith Brainard, Peter Diamond, Elizabeth Kellar, Steven Kreisberg, Jason Richwine, and Nathan Scovronick or helpul comments. Introduction Thmppmpyhphwkh. Fdd vpppdd hpy hmmhd vpd. A, ppmkwydp. Thmp– hxpmpd – hp. P, , jpmp, y mpmdwd h. Thqmp- y mph-d pvwhIssue in Brie. Thwhwwkwh mh, d, d xpwhhhpvhhp, -wkhy hwpy . Tk wh, mphwhy mp. Thbriekmwhdpph hqmphhd dm hHealth and Retirement Study. Ikwhh, hd hdy, -mpyd p wh mwh mhhpvp. Th, k hwh pwhhhd 65 d , my hhd hm, whh-mpymhp- vvwh d hw hd h-. Thdpdw. Th- phdd mhdy mhmp-mpymwh 65. Thd ph. Thy hw hhwh -mpymwhpmhhhpwk– -hd hp – hd pRESEARCH RETIREMENT LEARN MORE Sh hphp: crr.bc.edu
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Comparing Wealth in Retirement: State-Local Versus Private Sector Workers
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8/4/2019 Comparing Wealth in Retirement: State-Local Versus Private Sector Workers
State and Local Pension Plans Number 21, October 2011
COMPARING WEALTH IN RETIREMENT:STATE-LOCAL VERSUS PRIVATE SECTOR
WORKERSBy Alicia H. Munnell, Jean-Pierre Aubry, Joshua Hurwitz, and Laura Quinby*
* Alicia H. Munnell is the Peter F. Drucker Proessor o Management Sciences in Boston College’s Carroll School o Management and director o the Center or Retirement Researchat Boston College (CRR). Jean-Pierre Aubry is the assistant director o state and local research at the CRR. Josh Hurwitzand Laura Quinby are research associates at the CRR. The au-thors would like to thank Andrew Biggs, David Blitzstein, KeithBrainard, Peter Diamond, Elizabeth Kellar, Steven Kreisberg,
Jason Richwine, and Nathan Scovronick or helpul comments.
Introduction
Th mp p mpy h p h wk h . Fdd v p p p dd hpy h mm h d v pd. A , p p m k wy d p . Th mp –h xp mpd – h p . P, , j p mp, y mp m dw d h . Th q mp-y mp h - d pv w h Issue in Brie . Th w h w wk wh mh, d, d xp w hh h pv h h p, - wk hy h w py.
Tk wh, mp h w hy mp.
Th brie k mwh d pph h q mp hhdd m h Health and Retirement Study . I kwhh, h d h dy, - mpyd p wh m wh m h hpv p. Th , k hwh p wh h hd 65 d , my h h d hm, whh - mpym h p-v v wh d hw h d h - .
Th d pd w. Th - p h d d mhdy mh mp - mpym wh 65. Th d p h . Thyhw h h wh - mpym wh
p m h h h p wk – -hd h p – hd p
RESEARCH
RETIREMENT
LEARN MORE
Sh h p h p :crr.bc.edu
8/4/2019 Comparing Wealth in Retirement: State-Local Versus Private Sector Workers
p m wh 65 h m pv p. Th h w-hd h wh- mpym wh p h h h p wk dd p wh less wealth h pv mpy. Th hd d-
d y h y – h pyh - wk y, h dd p, d dvpm h mhm h ppy h dy’ v-m. Th d h, dp mm, h h h - wk p d p h h hpv p.
The Relationship between StateLocal Employment and Wealth
Th pp h brie h “m-” - d pv wk h “d h dy.” Em mdy wh, whh d , , dd , w h p v S Sy, dd p , d hh . “Ed h dy” dd 65. A 65 w d p whhmy hhd wd d d wd Md, wd hv m hh . Th dm h x whh hhd wh 65 d y -
mpym, h v hd h m.Th y d m h Health and Retire-
ment Study (HRS), y pv p d Am hhd. Th dy y vw ,65 dvd m 7,6 hhd 5-6 d h p(d ), d h vy h -dm-d vy w y . Ov m hh hv ddd h vy, y h mp z. Th y h h h d m h y- d md p. Gv h
h mp, h p h 65 6d h p 6. Th mp d, hhd, hy 37 p whh hdp m m h - .
Th md q hhdwh wh h pd 65 h p h pd’ d h p’ p - wk. (By , h p-d m d h p wm.) B- dd p k-dd – dydv, , d d
– h hp w - d wh wd xpd . Th, k h pd: p 5 p p -mpy; 5 p 5 p; d m h 5
p.3 F hw h hy q h - wk h h .4
Source: Ah’ m Uvy Mh,Health and Retirement Study (HRS) (1992-2008).
Figure 1. Distribution of State-Local Worersb Percent of Career Sent in te State-LocalSector, 199-200
32.4%
28.3%
39.3%
28.9%
42.2%
28.9%
0%
10%
20%
30%
40%
50%
RespondentSpouse
S-L% 5%
S-L5% 5%
S-Lv 5%
B pd wh h y, - hw h wh hhd wh - wk mp h hhdwh hy pv mpym. F- ( h x p) hw h h hpy v wh hw h dvd wkd - mpym. Cp wh -d- wk hv p m wh, whh wh h-d wk hv 3 p. Th q hw mh h d xpd y h h dvd d
h h j.I d h mp wk h- , y p- d j h h d whm. Th md p 65, qd m h pd. Th v dd h q p: dmph;py ; h wh; d jh.
8/4/2019 Comparing Wealth in Retirement: State-Local Versus Private Sector Workers
• Occupation. Th j d: m-m, p, v, , dm-v pp, d y, d x, m d p, pd-
, d p p.6
• Firm size. Fm z v p: 4mpy ; 5 ; 4; 5 ;d , .7
• Census region. Th dvdd v: Nh, Mdw, Sh, W, dOh.
N h h v d - y m m . Th h w not k: “F v v ,wh h mp wh -wk?” I y kwdd h qvdvd wd hv d m d-pd whh hy wkd h p p-v . Th q h “Gvp h, p, p z,d h y, d m m hhd wh 65 whh dvd pdh/h h pv p ?” Thd q d q .
ResultsDd pd h Ap-pdx. B d h mp -mpym, wh h h h v m wh h xpd d y .
Th mp - mpym pd F 3. Th hw h pd mh 5 p ’ - wk d wh p p mwh 65, d h y. A -hd h wh m -
mpym h y.Th hp w h pd
- d wh whxp, hh m h y . Th wh pd y m - mpym pp d p wh wh h h wh v wk pmpy. A -hd h wh p mpym h p. Th d p, v h my v wh v h p d v y d h -
N: Sd d h y - h 10-p v. Th ph hp w h h d wh.F pd h Appdx.Source: Ah’ m HRS (1992-2008).
Figure . Iact of Percent of Career as a State-Local Worer on Wealt of Coules itHusban Age , 199-200
-0.15
-0.07
0.18
-0.08
-0.03
0.11
-0.2 -0.1 0 0.1 0.2
Respondent
Spouse
S-L% 5%
S-L5% 5%
S-Lv 5%
d m m pym. Adh wh wk mpy wh S Syv wh mh h hy wd hv d h pv . Th wh pd md- p h (5 p 5 p) - mpym k vy m pv mpy m wh 65.
Questions Raised by the Analysis
Th pd v m q-. Hw d w p y -m - wk? D mpy vd y dd p pp vm? A 6-6 pp ?
Early Retirement
Th y mpy m h - d
pv wk h m m. Bwh - wk hd d pd hy w vd 65? T k xm xmp, pp hy hd -d m - j d hd vd pd hh 5 y, m 5 65. Sh p q dd w : )h v p d hh vdd h pd; d ) h v h jyd. Th p h
8/4/2019 Comparing Wealth in Retirement: State-Local Versus Private Sector Workers
y pd h y. Th p vwd qv w, d h x h vd vd h dwdw md, w d h wh -. Smy, v m hv ph
hh w hw p h wh 65. Th y m wd h h m hd 5 y . V h wd mp y m mpy p v pv mp.
A d , h w mjpm. A hw F 4, m h p-d wh hd p m h - dd p m pv j. I m m , h p mpy whmvd h pv d hy hm wk wh hd p h - h pv ( F 5). Th whd dy m h - j dd y, hy d y m h wh - mpym. I h, h d hv mpd h y d h mp.
A d h m h mvd y - mpy wh v h p- j d mv h pv . Thdvd wd w m h pvmpy d ( ) d myv p m h m - m-py. A, h x h y h m
vd, w d h wh .
Source: Ah’ m HRS (1992-2008).
Figure . Distribution of Resonents b Job atRetireent, 199-200
3%
21%
76%
0%
20%
40%
60%
80%
Retired fromS-L job
S-L retired fromprivate job
Private worker
Source: Ah’ m HRS (1992-2008).
Figure . Aerage Retireent Age of Men WoHae Retire b Age , b Sector
58.2
61.661.2
55
57
59
61
63
Retired fromS/L job
S/L retired fromprivate job
Private workerRd mS-L j
S-L d mpv j
Pv wk
The Role o Deined Beneit Plans
Th hhd wh -d - wk- d p wh wh h hhd wh hy pv mpym d -h h ) hy vd m mp; ) hy wkd dd vmwh hy w d v. Idd, 7 p - hhd h mp v dd p mpd 5 p pv - hhd.
T h mp vd y
dd p, w -md h q,d v d h p dd p. Th hw h h dv -d - wk dppy m, h yd m z ( F 6, h x p). I h wm, h m, dd. Th d p v hwm’ v w hh h p h h pv . I y v, h h wh mp w -d pv wk d y h d-p mpd y h p .
8/4/2019 Comparing Wealth in Retirement: State-Local Versus Private Sector Workers
N: Sd d h y - h 10-p v.Source: Ah’ m HRS (1992-2008).
Figure . Iact of Long State-Local Tenure onTotal Houseol Wealt, Controlling forDefine Benefit Particiation
0.14
0.06
0.18
0.11
0 0.05 0.1 0.15 0.2
Spouse
Respondent
Without DB control
With DB control
Applicability to Today
Th y v h pd 6-6, d hq h x whh -m. A m h hv d h v pd. F xmp, dy’ pv ky hv dd
p d hh h h -p h p, whh wd h h h wd mpd p mpy-. O h h hd, p w v h h pv hv dd v m,d y vm p hv dmpy p, --vdjm, dd w mpy,d d mpy pmm d -pym hh, whh wd h h hh d.3 O , hw dvpm wd h p.
Conclusion
Th y d h dv - v pv mp. I
v whh, h d h dy, -mpy d p h p h h p-v p. Th vvd k- h wh – dd dy d hh w S Syd dd p wh – -d pv p wh h hd w65. A ky whm, h hwd h h -hd h wh - mpym wh p mh -h h p mpym hdhhd wh h w p p 65. Sq y h h
wh my w d vhh pp dd p.Th h w-hd h wh - mpy-m wh p h h h pwk dd p wh wh h pv mpy. I h, p, p wh - wk, q, d d p h hp wh pv .
8/4/2019 Comparing Wealth in Retirement: State-Local Versus Private Sector Workers
Th mp d md p wh h hd 65 m h h ( w 3d 4) h Health and Retirement Study (HRS).
Rm d RAND v h k whh h pd d hm/h -d. Th pd m m mpy d, h wh m py d q-y wk h - p-m. Sp d my.
Total Wealth
RAND m hhd – d d , ppy d p -, d IRA hd – d d. RAND d xpy d 4(k) h whm, h HRS k q h p y wh pd h j . Hw-v, dy d h p 4(k) d v IRA wh v y h mpy v wk.4 F h , w m h h IRA v p h mjy 4(k)
. I d , wh m w d v p wk.O p h wh m, h y dd wh m p, S Sy, d hh . Ly, wh d 6 d h CPI.
Pension wealth. A h mm h mp d, w v h m mdd p. P m pd wv h pd m hv d. F h , w k h p m h pd wv h pd 65. I v, w pd 65 6 p h h RAND -mp.
Th m h p v p wh :
NPV pension
= ∑
Annual Pensioni,t
Wh Survival Probability q h mpd py v h y v h pd’ , d d S Sy . COLA h --v djm. Th HRS kwhh p h j v COLA. I h v m, w m h d wk v COLA, d h pv wk d . W d mk mp h v h COLA; w h .5 p d h v COLA h Public Plans Database (PPD).5 Th d 6 p – 3 p d 3 p .
Th q mpd y h h m p h y wh h j vv. I h p dd hh h p’ dh, w h p
v (NPV) h ) h NPV d d h m my ; ) h NPV dd h m my . I h p dd h p’ dh, h vvp’ md 5 p h wk’.
Social Security . Th x S Sy wh m h p. Th - h Respondent Cross-Year Summary Earnings d. Th COLA q 3 p, d h d q 6 p.
Bh m d wm v vv , w d y h vv h h dvd . Th S Sy Adm v m - vv d h F Rm A, h m , d mp, d hp’ .
Center for Retirement Research8 C Rm Rh
Annual Pensioni,t
= Annual Pensioni,t-1
* Survival Probability Respondent i,t
* ( + COLAi,t
) / ( + Discount Ratet
)
-age
i=
8/4/2019 Comparing Wealth in Retirement: State-Local Versus Private Sector Workers
Retiree Health Insurance. Th RAND d m whh h pd d p v-d y hh . Th dvd wv d d whh h mpy v , p, h pmm. P v dd 5 p h pmm. Th, hhd whh mpy v h pmm wdd h NPV h m m pmm, whhhd wh h mpy y v h wdd h h m.
Survivor Beneft
i,t-1* Mortality Probability Spouse
i,t * Survival Probability Respondent
i,t *
( + COLAt ) / ( + Discount
t )
Survivor Beneft i,t
=
Th pmm m m 6 K/Hw vy hh .6 Ad h dy, h v -y pmm w 65 d w $3,4 6.7 Wd h dvd pmm h hhd wh h h hd d w vd.
Pmm wh q:
Premium i,t = Premium i,t-1 * Survival Probability Maleit * ( + COLAt ) / ( + Discount t )
F mpy, w h md y h m my . COLA q h d p-jd real md , pd y h C Bd O (). Smy, h d 3 p.
Independent Variables
S-L tenure. Th v h p p - wk. Th m y p wk dd h dvd wv d d d hRAND d. Th p - v mpy dvd h w, d h z h hhh (v 5 p), mdm (v 5 p h 5 p), d w ( h q
5 p).
Age o spouse. Th v h p’ wh h pd 65. I d y hp’ h y, vd h RAND d, m h y h h pd 65.
Lie expectancy . Th v h -pd py v 75 pd h RAND d.
Education. Th v m y d d m m RAND.
Career spouse. Th v q h p wkd y d d h 5.Rm dmd y h y m m y pd h RAND d.
Career spouse* ed . Th v d d p h hyph h h mp
wh d w vy wh d.
Stocks %. Th v m k p (h whh pd RAND).
Risk aversion. Th HRS k pp h w p j wh h py m ky.Bd h p, hy d v k p m k v 6 m k v. Rk v dd v 5 6.
Long horizon. A dmmy v m h RAND d q h p hz h v y d z hw.
8/4/2019 Comparing Wealth in Retirement: State-Local Versus Private Sector Workers
Received inheritance. A v q h v p h h p pd h wv d. Th HRS v m p h p h, d h y whh hh w vd. Th h d y 6-p m m h y hy w
vd h pd 65.
Expect inheritance. A v q h xpd v h pd hwv d. Th HRS k hhd h py h h pd p v h- h , wh h xpd m. F h x, h xpd m mpd yh py p.
Black. A dmmy v m h k q h pd k d z hw.
Hispanic . A dmmy v m h k q h pd Hp d z h-w.
Occupation. RAND p hd j 7 , whh w d mp-
y wh M . (). Th dd : mm, p, v, , dm-v pp, d y, d x, m d p, pd, dp p. Lk M ., w xd mm h md .
Census region. A v v dhm v m h RAND d.
Firm size. Th v h m mpy h pd’ m h dvd wv d.Hwv, m m v mp d p v m h Cur-rent Population Survey h p d pv wk py. Ly, m z k dw v dmmy v: 4 mpy ; 5 ; 4; 5 ; d , .
8/4/2019 Comparing Wealth in Retirement: State-Local Versus Private Sector Workers
Table B2. Regression Results on Total Houseol Wealt, 199-200 (continue)
V Exd DB Id DB
L hz [S]
Rvd h [H]
Exp h [H]
Bk
Hp
C
0.001(0.00)
8.-0
(1.99-0)
2.-0
(1.01-0)
-0.8
(0.00)
-0.21
(0.0)
10.
(0.8)
***
**
***
***
***
0.010(0.09)
8.1-0
(2.0-0)
2.0-0
(9.0-08)
-0.9
(0.0)
-0.219
(0.02)
10.2
(0.8)
***
**
***
***
***
R-qd
Nm v
0.1
1,100
0.988
1,100
N: Add dpd d v p, m z, d dmmy v. [R] dh pd, [S] d h p, d [H] d h hhd. C h 10-p v(*), -p v (**), 1-p v (***).Source: Ah’ m Health and Retirement Study (1992-2008).
8/4/2019 Comparing Wealth in Retirement: State-Local Versus Private Sector Workers
About the CenterTh C Rm Rh B C- w hd hh m hS Sy Adm. Th C’ m pd - h d d d k w h dm m-my d d-mk h p d pv d mp h’ . T hv h m, h Cp wd vy h pj, mw d d d, w h-, d d v d .S p, h C h hd p- hv m mj p h m m d.
Ailiated InstitutionsAm Ep ITh Bk IMh I ThySy UvyU I
The Center or Retirement Research thanks AARP, Bank o America, InvescoSM, MetLie, MFS Investment Management, National Reverse Mortgage Lenders Association, Prudential Financial, Putnam Investments,State Street, TIAA-CREF Institute, T. Rowe Price, and USAA or support o this project.