Personal Retirement Accounts and Saving

Determinants of retirement of formal and informal sector workers in Mexico: the role of health and economic security

OBJECTIVE

We examine the socioeconomic and health drivers of retirement decisions and compare these determinants between formal and informal sector workers in Mexico.

MATERIALS AND METHODS

Using data from the Mexican Health and Aging Study 2012 and 2015, we estimate conditional probit models of retirement using sociodemographic, health, health care utilization, health insurance, private pensions, and social security systems covariates. The Institutional Review Board at the University of Southern California reviewed and approved the research (IRB # UP-15-00023).

RESULTS

We find that the social security systems are an important determinant for retirement age for formal sector workers. The informal sector workers, who lack access to retirement benefits of the social security system, make retirement decisions mainly based on health and access to health insurance through social security.

CONCLUSION

Despite the lack of access to social security benefits, informal sector workers do not respond strongly to socioeconomic factors in determining the timing of retirement. Strengthening access to better health care services could improve health, extend working lives, and promote healthy aging for workers in the informal sector.

Who wants to reopen the economy during the COVID-19 pandemic? The daring and uncaring

Economic shutdowns, which refer to disallowing employees to work on site, are among the most contentious approaches to reduce the spread of COVID-19. While economic shutdowns save lives, their large economic costs have caused some people to develop strong attitudes and even break government-issued mandates, which incurs health risks and often the need to extend the economic shutdowns. In the current article, we argue that the interaction of two personality characteristics, risk-taking tendencies and prosocial tendencies, is a strong determinant of attitudes toward economic shutdowns, and we assess the impact of this interaction on three different attitudes toward economic shutdowns that differ by their focal target: employees, customers, and organizations. The results demonstrate that this interaction significantly predicted economic shutdown attitudes toward customers and organizations but not employees. We suggest that these results can be understood via the lens of behavioral decision-making theories as well as a recent framework on antisocial risk takers, both of which provide several subsequent directions for future research. We conclude with recommendations for the development of effective messages to curb defiant behaviors toward economic shutdowns, such as focusing on those most likely to perform these problematic behaviors – the daring and uncaring.

Effect of Social Security System on Consumption through Income and Uncertainty: Evidence from China

In our paper, we test how the social security system affects citizens’ consumption behavior through narrowing the income gap between residents with different social status and decreasing the uncertainty of income and cost. In the theoretical part, we firstly extend the model of Keynes to test the income distribution hypothesis; then, we use the coefficient of absolute risk aversion (CARA) model and a two-period model to test the uncertainty hypothesis. Empirically, (1) we use China’s data (2003–2012) to test the theoretical results, and find that the social security system has a positive effect on consumption by reducing the income gap; (2) according to a 10-year panel data (2003–2012), we find that reducing income uncertainty can increase consumption. Besides, medical insurance and endowment insurance have a positive impact on consumption by reducing citizens’ cost uncertainty, but to different extents.

Changes in Spending and Labor Supply in Response to a Social Security Benefit Cut: Evidence from Stated Choice Data

We investigate how individuals in the U.S. expect to adjust their labor force participation and savings if Social Security benefits were cut by 30 percent. Respondents were asked directly what they would do under this scenario. Using the resulting stated choice data we find that respondents would on average reduce spending by 18.2 percent before retirement and 20.4 percent after retirement. About 34.1% of respondents state they would definitely work longer and they would postpone claiming Social Security by 1.1 years. We investigate how working longer and claiming Social Security later would compensate partially for the loss in benefits among the individuals who are currently working, under the assumption that individuals retire and claim at the same time. Individuals would increase their Social Security benefits from the post-reform level due to additional earnings entering the benefit calculation and a smaller early claiming penalty (or higher delayed claiming credit). As a result, the Social Security benefit people would receive would drop on average by 21 rather than 30 percent. Still, the net financial loss, even after accounting for additional earnings, is sizeable for individuals in the lowest wealth tertile.

How Do Management Fees Affect Retirement Wealth under Mexico's Personal Retirement Accounts System?

In 1997, Mexico transformed its pay-as-you-go social security system to a fully funded system with personal retirement accounts, including management fees. This article examines changes in retirement wealth resulting from this new system. It shows that management fees have drained a significant proportion of individuals' retirement wealth and have increased the number of persons claiming a government-subsidized minimum pension, particularly from the time the system was introduced in 1997 until adjustment to management fees in 2008. Since 2008, retirement wealth accumulation has been similar to that of the previous system. En 1997, México transformó su sistema de pensiones basado en cotizaciones individuales a uno de ahorro para el retiro que incluyen cuotas por la administración de las cuentas. El presente estudio examina los cambios en el monto de las pensiones como resultado de la introducción del nuevo sistema. Los resultados muestran que las cuotas de administración han drenado una proporción significativa del ahorro para el retiro de los individuos por lo que ha aumentado el número de personas que solicita la pensión mínima garantizada subsidiada por el gobierno desde que se introdujo el sistema en 1997 hasta que se hicieron ajustes en las cuotas de administración de los fondos de pensiones en 2008. A partir de 2008, la acumulación del ahorro para el retiro ha sido similar que la del sistema anterior.

Male Labor Force Participation and Social Security in Mexico

Labor-force participation among Mexican males in their early retirement years (60 to 64 years of age) has decreased in recent decades, from 94.6 percent in 1960 to 65.2 percent in 2010. Similar trends are evident elsewhere in Latin America, and have occurred in the developed world. Such trends pose challenges to financial sustainability of social security systems as working-age populations decrease and those in retirement increase both because of demographic trends and decisions to take early retirement. In this study, we find that the Mexican social security system provides incentives to retire early. The retirement incentives of the Mexican social security system affect retirement behavior, and may be one of the main contributors to early retirement decisions, particularly for lower-income populations. We simulated the effect of the reform from a Pay-As-You-Go (PAYG) to the new Personal Retirement Accounts (PRA) system and we find that the PRA system also provides incentives to early retirement. Further analysis is needed to assess the financial sustainability of the social security system and financial security in old age for the largest cohorts in Mexico that will begin to retire by 2040.

Personal Retirement Accounts and Saving

Aging populations are leading countries worldwide to social security reforms. Many countries are moving from pay-as-you-go to personal retirement account (PRA) systems because of their financial sustainability and positive impact on private savings. PRA systems boost private savings at a macro level by converting a government liability into financial wealth managed by private fund managers. However, at a micro level, changes in retirement wealth affect individuals' saving and consumption patterns through their working lives. Retirement wealth increased for lower-income workers after Mexico introduced PRAs, crowding out saving, increasing consumption, and offsetting some of the PRA effect on private savings. (JEL D14, E21, H55, J26, O16).