The Effects of Private Pension Types on Older American Workers Portfolio Decisions and the Role of Health Measures in Understanding Expected Longevity

Private pensions are regarded as the most important source of retirement income other than Social Security. Previous studies have found significant effects of pensions on individual decisions regarding wealth accumulation, labor supply, and retirement income security. However, few studies have investigated the effects of pension on individuals portfolio choices. Using the Health and Retirement Study (HRS), a panel data set of Older Americans. my study is one of the first to investigate pension effects on older American workers portfolio choices by differentiating Defined-Benefit (DB) pensions from Defined-Contribution (DC) pensions. I first investigate how pension types affect individual stock market participation by performing a two-step procedure. Without differentiating between pension types, pension has been found to have a positive effect on stock investments. My results of both cross-sectional and panel analysis, after correcting for sample selection, and controlling for unobserved heterogeneity, show that compared to holding a DB pension, holding DC pensions not only decreases an individuals probability of participating in the stock market, but also leads to less investments in stocks after stock market entry. Secondly, I test pension type effects on older workers investment decisions in individual retirement accounts (IRAs), over which individuals have full control. Panel analysis shows that individuals with DC pensions are more likely to hold IRAs compared to those who have DBs. I also find that individuals have rather consistent investment patterns within their pension and IRA accounts. In order to better understand how individual expected longevity evolves over time, which can affect Older Americans investment planning horizon, we propose to use the self-reported health change as a direct measure of health flows in empirical models. Our results show that after controlling for both subjective and objective measures of health status and unobserved heterogeneity in reporting, self-reported health changes are a more appropriate measure of health dynamics than those used in earlier studies.

ISBN 9781124539911

Stock market

62450