Retired Household Responses to a Persistent Low Interest Rate Environment Jason S. Seligman, Senior Economist, ICI Jason J. Fichtner, Senior Research Fellow, Mercatus Center May 4 th 2017 Pension Research Council & The Boettner Center for Pensions and Retirement Research
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Presentation to
Retired Household Responses to a Persistent Low Interest Rate Environment
Jason S. Seligman, Senior Economist, ICI
Jason J. Fichtner, Senior Research Fellow, Mercatus Center
May 4th 2017
Pension Research Council & The Boettner Center for Pensions and Retirement Research
Motivation
» interest rates have been at historic lows since 2008» some benchmark rates have in fact been negative
»we investigate how retirees are coping with these low rates» we employ HRS panel data, we target a retiree sample» We look for patterns / strategies for coping with low rates
»broadly, we find:» high wealth households have benefitted from strong equity returns» low wealth households have depleted assets including home equity
Retired Household Responses to a Persistent Low Interest Rate Environment 1May 4 2017
HRS Data
»biannual data targeting households aged 50+ from 1992-2014
»opportunity to look at self-reported wealth and allocations
»conditioning on:
»households’ placement within the 2014 wealth distribution
»controlling for:
»risk preference, home ownership & socio-economic factors.
» low interest rate period from 2008 – 2014.
Retired Household Responses to a Persistent Low Interest Rate Environment2May 4 2017
Graphical Analysis of Retirees 1992 – 2014
»we will next take six looks at retiree assets
»note the relative evolution of assets & allocations by group
»the next six slides will depict the evolution of:
» wealth
»equity & mutual fund allocations
» independent bond & safe asset allocations
» liquid assets & LTV for households’ primary residence
Retired Household Responses to a Persistent Low Interest Rate Environment 3May 4 2017
Wealth Evolution Among the Retired I of VI
Retired Household Responses to a Persistent Low Interest Rate Environment 4May 4 2017
For HRS households with a retired person; 2015 dollars ( = 2008 wave)
-100,000
0
100,000
200,000
300,000
400,000
500,000
-2 0 2 4 6 8 10 12 14 16 18 20Average Years Since Retirement
below median
bottom 10-percent
all but top 10 - percent
all but top 1 - percent
75 - percent
25 - percent
-100,000
900,000
1,900,000
2,900,000
3,900,000
4,900,000
5,900,000
6,900,000
7,900,000
8,900,000
-2 0 2 4 6 8 10 12 14 16 18 20Average Years Since Retirement
top 10 - percent
top 1 - percent
Retired Household Responses to a Persistent Low Interest Rate Environment 5May 4 2017
For HRS households with a retired person; percentage of wealth ( = 2008 wave)
Equity & Mutual Fund Allocations II of VI
-4%
-2%
0%
2%
4%
6%
8%
10%
-2 0 2 4 6 8 10 12 14 16 18 20
Average Years Since Retirement
below median
bottom 10-percent
all but top 10 - percent
all but top 1 - percent
75 - percent
25 - percent
-5%
0%
5%
10%
15%
20%
25%
30%
-2 0 2 4 6 8 10 12 14 16 18 20Average Years Since Retirement
top 10 - percent
top 1 - percent
Note: some portion of represented rebalancing could be automatic.
Retired Household Responses to a Persistent Low Interest Rate Environment 6May 4 2017
For HRS households with a retired person; percentage of wealth ( = 2008 wave)
Bond Allocations III of VI
-0.1%
0.1%
0.3%
0.5%
0.7%
0.9%
1.1%
-2 0 2 4 6 8 10 12 14 16 18 20Average Years Since Retirement
below median
bottom 10 - percent
all but top 10 - percent
all but top 1 - percent
75 - percent
25 - percent
-1%
1%
3%
5%
7%
9%
-2 0 2 4 6 8 10 12 14 16 18 20Average Years Since Retirement
top 10 - percent
top 1 - percent
Note: some portion of represented rebalancing could be automatic.
Retired Household Responses to a Persistent Low Interest Rate Environment 7May 4 2017
For HRS households with a retired person; percentage of wealth ( = 2008 wave)
Safe Asset Allocations: CDs, Savings Bonds, T-bills IV of VI
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
-2 0 2 4 6 8 10 12 14 16 18 20Average Years Since Retirement
below median
bottom 10 - percent
25 - percent
lower 25 - percent
10 - percent
all but top:1 - percent
0%
2%
4%
6%
8%
10%
12%
14%
-2 0 2 4 6 8 10 12 14 16 18 20Average Years Since Retirement
top 10 - percent
top 1 - percent
Note: some portion of represented rebalancing could be automatic.
Retired Household Responses to a Persistent Low Interest Rate Environment 8May 4 2017
Proportion of Liquid to Total Wealth V of VI
For HRS households with a retired person; percentage ( = 2008 wave)
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
-2 0 2 4 6 8 10 12 14 16 18 20Average Years Since Retirement
below median
bottom 10 - percent
75 - percent...
25 - percent
0%
5%
10%
15%
20%
25%
-2 0 2 4 6 8 10 12 14 16 18 20Average Years Since Retirement
top 10 - percent
top 1 - percent
Note: some portion of represented rebalancing could be automatic.
Retired Household Responses to a Persistent Low Interest Rate Environment 9May 4 2017
For HRS households with a retired person; percentage of home’s worth ( = 2008 wave)
Loan to Value VI of VI
10%
20%
30%
40%
50%
60%
70%
80%
90%
-2 0 2 4 6 8 10 12 14 16 18 20Average Years Since Retirement
below median
bottom 10 - percent
75 - percent
25 - percent
0%
5%
10%
15%
20%
25%
30%
-2 0 2 4 6 8 10 12 14 16 18 20
Average Years Since Retirement
top 10 - percent
top 1 - percent
Note: it is possible to break out changes in mortgage balances and home values. home values have declined and mortgage values have increased among the bottom 10 percent of the wealth distribution
HRS Panel Data Regression Analyses
»for wealth we employ a panel spanning: 1992-2014
»for allocations we employ a panel Tobit method to handle potential censoring at zero
»the next four slides will offer a highline look at what we see
Retired Household Responses to a Persistent Low Interest Rate Environment 10May 4 2017
Regression – Total Wealth I of IV
Retired Household Responses to a Persistent Low Interest Rate Environment 11May 4 2017
In various specifications results coefficients were within a range of -0.2 to 0.5 percent of the figures above, in all cases.
Controls:
household labor force participation {0, 1}, household reports retirement {0, 1}, number of years retired, household holds a DB pension {0,1}, household holds a DC account {0,1}, household has OASI income {0,1}, household has SSI or DI income {0,1}, home ownership {0,1}, risk {1, …, 4} least to most risk averse, education {max: respondent, spouse}, education range {max - min: respondent, spouse}, whether household is white {0, 0.5, 1}, whether Hispanic {0, 0.5, 1}, respondent is female, respondent is married, married & female, age {max: respondent, spouse}, age squared, cohort controls, constant.
Panel Regression - Dependent Variable:
Total Assets ($2015) coefficient z-stat
low interest rate era {0,1} -$84,064 -10.56
2014 wealth in bottom 10 percent {0,1} -$104,999 -3.38
2014 wealth in top 10 percent {0,1} $1,233,174 60.65
general result
Equity Allocations II of IV
Retired Household Responses to a Persistent Low Interest Rate Environment 12May 4 2017
In various specifications results coefficients were within a range of -0.1 to 0.2 percentage point of the figures above, in all cases.
Controls:
household labor force participation {0, 1}, household reports retirement {0, 1}, number of years retired, household holds a DB pension {0,1}, household holds a DC account {0,1}, household has OASI income {0,1}, household has SSI or DI income {0,1}, home ownership {0,1}, risk {1, …, 4} least to most risk averse, education {max: respondent, spouse}, education range {max - min: respondent, spouse}, whether household is white {0, 0.5, 1}, whether Hispanic {0, 0.5, 1}, respondent is female, respondent is married, married & female, age {max: respondent, spouse}, age squared, cohort controls, constant.
Panel Tobit - Dependent Variable:
Equity and Mutual Fund Allocations coefficient z-stat
low interest rate era {0,1} -1.5% -5.59
2014 wealth in bottom 10 percent {0,1} -2.4% -3.73
2014 wealth in top 10 percent {0,1} 8.8% 21.89
general result
Bond Allocations III of IV
Retired Household Responses to a Persistent Low Interest Rate Environment 13May 4 2017
In various specifications results coefficients were within 0.1 percentage point of the figures above, in all cases.
Controls:
household labor force participation {0, 1}, household reports retirement {0, 1}, number of years retired, household holds a DB pension {0,1}, household holds a DC account {0,1}, household has OASI income {0,1}, household has SSI or DI income {0,1}, home ownership {0,1}, risk {1, …, 4} least to most risk averse, education {max: respondent, spouse}, education range {max - min: respondent, spouse}, whether household is white {0, 0.5, 1}, whether Hispanic {0, 0.5, 1}, respondent is female, respondent is married, married & female, age {max: respondent, spouse}, age squared, cohort controls, constant.
Panel Tobit - Dependent Variable:
Bond Allocations coefficient z-stat
low interest rate era {0,1} -0.1% -4.27
2014 wealth in bottom 10 percent {0,1} -0.2% -1.92
2014 wealth in top 10 percent {0,1} 1.6% 23.30
general result
Use of Home Equity IV of IV
Retired Household Responses to a Persistent Low Interest Rate Environment 14May 4 2017
In various specifications results coefficients were within 1.5 percentage points of the figures above, in all cases.
Controls:
household labor force participation {0, 1}, household reports retirement {0, 1}, number of years retired, household holds a DB pension {0,1}, household holds a DC account {0,1}, household has OASI income {0,1}, household has SSI or DI income {0,1}, home ownership {0,1}, risk {1, …, 4} least to most risk averse, education {max: respondent, spouse}, education range {max - min: respondent, spouse}, whether household is white {0, 0.5, 1}, whether Hispanic {0, 0.5, 1}, respondent is female, respondent is married, married & female, age {max: respondent, spouse}, age squared, cohort controls, constant.
Panel Tobit - Dependent Variable:
Loan to Value | Home Ownership coefficient z-stat
low interest rate era {0,1} 2.2% 7.20
2014 wealth in bottom 10 percent {0,1} 85.2% 13.40
2014 wealth in top 10 percent {0,1} 0.0% 0.00
general result
Summary of Findings
»households report declined shifts into bonds and safe assets.
»instead, we find negative wealth impacts in general
» - and that: » high wealth households have benefitted from strong equity returns
» low wealth households have depleted assets – including home equity
» on average, we observe wealth being near depletion 16 – 18 years following retirement for the bottom quarter of our sample.
Retired Household Responses to a Persistent Low Interest Rate Environment 15May 4 2017
Policy Implications
»given observed asset declines social insurance is acutely valuable for financing retirement
Policies should educate, encourage and facilitate claiming Social Security retirement benefits in order to maximize the utility gained from the inflation-protected annuity value offered.
Retired Household Responses to a Persistent Low Interest Rate Environment 16May 4 2017
Thank You
» comments welcome
Jason J. Fichtner Senior Research Fellow, Mercatus Center