Andrew Samwick of Dartmouth College and NBER reviews “Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy” by Teresa Ghilarducci. The Econlit abstract of this book begins: “Explores the implications of compelling older people to work longer, presenting a pro-worker alternative that, instead of cutting pensions and forcing work on elders, enforces anti-age-discrimination laws, institutes effective job training, and pays for good pensions and more Social Security benefits.”

We examine compensation contracts for managers in imperfectly competitive product markets. We show that strategic interactions among firms can explain the lack of relative performance‐based incentives in which compensation decreases with rival firm performance. The need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance. Firms in more competitive industries place greater weight on rival firm performance relative to own firm performance. We find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry.

Declining fertility, mortality, and productivity rates in developed countries and the popularity of the social security privatization in Chile as a pathway to financial development have sparked a global interest in social security reform. This paper analyzes the effect of social security on saving using a panel of countries over 25 years. Variation in the characteristics of social security systems is used to determine whether less reliance on a pay-as-you-go, unfunded system is associated with higher national saving. There is little evidence that countries that implement defined-contribution reforms have higher trends in saving rates after the reform. Cross-sectionally, countries with pay-as-you-go systems tend to have lower saving rates, and this effect increases with the coverage rate on the system.

We consider the equilibrium relationships between incentives from compensation, investment, and firm performance. In an optimal contracting model, we show that the relationship between firm performance and managerial incentives, in isolation, is insufficient to identify whether managers have private benefits of investment, as in theories of managerial entrenchment. We estimate the joint relationships between incentives and firm performance and between incentives and investment. We provide new results showing that investment is increasing in incentives. Further, in contrast to previous studies, we find that firm performance is increasing in incentives at all levels of incentives. Taken together, these results are inconsistent with theories of overinvestment based on managers having private benefits of investment. These results are consistent with managers having private costs of investment and, more generally, models of underinvestment.

Policy uncertainty reduces individual welfare when individuals have limited opportunities to mitigate or insure against the resulting consumption fluctuations. We field an original survey to measure the degree of perceived policy uncertainty in Social Security benefits and to estimate the impact of this uncertainty on individual welfare. Our central estimates show that on average individuals are willing to forgo 6 percent of the benefits they are supposed to get under current law to remove the policy uncertainty associated with their future Social Security benefits. This translates to a risk premium from policy uncertainty equal to 10 percent of expected benefits.

We estimate how much of the wealth of a sample of respondents to the Panel Study of Income Dynamics is held because some households face more income uncertainty than others. We begin by solving a theoretical model of saving, which we use to develop appropriate measures of uncertainty. We then regress households' wealth on our measures of uncertainty, and find substantial evidence that households engage in precautionary saving. Finally, we simulate the wealth distribution that our empirical results imply would prevail if all households had the same uncertainty as the lowest uncertainty group. We find that between 32 and 50% of wealth in our sample is attributable to the extra uncertainty that some consumers face compared to the lowest uncertainty group.

Two decades ago, most workers with pensions had a defined benefit (DB) plan. The employer made necessary contributions and investments to meet promised pension benefit payments when the employee retired. By 1993, the tide had turned; more than half of covered employees participated primarily in defined contribution (DC) pensions such as 401(k) plans [Employee Benefit Research Institute (EBRI), 1997]. This dramatic shift was associated as well with growing concerns about the emerging 401(k) plans. Some viewed 401(k) plans as a crisis waiting to happen when current generations, having made minimal (or no) contributions to their DC plan, retired with inadequate pension asset balances (Karen Ferguson and Kate Blackwell, 1995; Anne Willette, 1995). Another concern was that workers switching jobs would use the lump-sum distributions for houses, boats, or other purchases rather than reinvesting them in another retirement account [Ellen E. Schultz, 1995; U.S. Department of Labor (USDOL), 1998a]. In a similar vein, newly retired workers may not roll over the assets into an annuity and therefore risk spending down their retirement wealth too early (e.g., Jeffrey R. Brown and Mark J. Warshawsky, 2001). The most serious charge against 401 (k) plans,

The principal‐agent model of executive compensation is of central importance to the modern theory of the firm and corporate governance, yet the exiting empirical evidence supporting it is quite weak. The key prediction of the model is that the executive's pay‐performance. We demonstrate strong empirical confirmation of this prediction using a comprehensive sample of executives at large corporations. In general, the pay‐performance sensitivity for executives at firms with the least volatile stock prices is an order of magnitude greater than the pay‐performance sensitivity for executives at firms with the least volatile stock prices. This result holds for both chief executive officers and other highly compensated executives. We further show that estimates of the pay‐performance sensitivity that do not explicity account for the effect of the variance of firm performance are baised toward zero. We also test for relative performance evaluation of executives against the performance evaluation model. Our findings suggest that executive compensation contracts incorporate the benefits of risk sharing but do not incorporate the potential informational advantages of relative performance evaluation.

ABSTRACT We show that top management incentives vary by responsibility. For oversight executives, pay‐performance incentives are $1.22 per thousand dollar increase in shareholder wealth higher than for divisional executives. For CEOs, incentives are $5.65 higher than for divisional executives. Incentives for the median top management team are substantial at $32.32. CEOs account for 42 to 58 percent of aggregate team incentives. For divisional executives, the pay– divisional performance sensitivity is positive and increasing in the precision of divisional performance and the pay– firm performance sensitivity is decreasing in the precision of divisional performance. These results support principal–agent models with multiple signals of managerial effort.

We develop a contracting model between shareholders and managers in which managers diversify their firms for two reasons: to reduce idiosyncratic risk and to capture private benefits. We test the comparative static predictions of our model. In contrast to previous work, we find that diversification is positively related to managerial incentives. Further, the link between firm performance and managerial incentives is weaker for firms that experience changes in diversification than it is for firms that do not. Our findings suggest that managers diversify their firms in response to changes in private benefits rather than to reduce their exposure to risk.