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From the Special Issue Editor

Vickie L. Bajtelsmit

It is my great pleasure to have served as Special Issue Editor for Volume 9, Number 1 of
theFinancial Services Reviewand to offer you eight outstanding articles covering a variety
of issues related to retirement. The topic of this issue “Ensuring Retirement Income Ade-
quacy in the Next Century” is quite timely and has implications for all of us, whether or not
we are doing research in retirement investment, pensions, or social security.

The retirement of the baby boom is fast approaching and, despite the strength of the
economy in recent years, there is much concern among policy-makers that this generation is
financially ill-prepared for retirement. This is not an insignificant problem in light of the
demographic changes facing this country and others worldwide. The aging of the population
is predicted to place great strain on financial markets as the flow of investment funds reverses
direction, and retirees gradually liquidate asset portfolios to fund cash flow in retirement. The
social security administration predicts that, although we can expect many more years in
which payroll tax inflows exceed benefit outflows while the baby boom enjoys their peak
earning years, their retirement which begins in 2008 will eventually bankrupt the social
security trust fund in the absence of significant reform, and this will occur sooner if
politicians continue to look for ways to spend the surplus. In recognition of the “three-legged
stool” concept of retirement planning, this issue of theFinancial Services Reviewaddresses
problems and solutions in all three areas: private pensions, social security, and individual
savings.

How will individuals respond to a shortfall of financial resources as retirement ap-
proaches? A large percentage of U.S. workers do not have access to employer-provided
pensions, and some cross-sections of individuals, most notably women, have significantly
lower pension sponsorship and participation rates. Furthermore, U.S. savings rates are low
relative to other developed countries and studies have reported that the average household in
the U.S. has too little retirement wealth accumulation. Individuals approaching retirement
under these circumstances have few choices. Two of the articles in this issue address the
timing of retirement. In “Determinants of Planned Retirement Age,” Catherine Montalto,
Yoonkyung Yuh, and Sherman Hanna use the Health and Retirement Study dataset covering
older households to consider the factors that influence planned retirement age. Although
individuals may have plans to retire earlier while they are young, planned retirement age
increases with age, perhaps an indication that inadequacy of retirement wealth is forcing

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longer working periods. Walt Woerheide takes a different approach to this question in his
paper, “The Impact of the Pension on the Decision to Work One More Year,” in which he
estimates the net benefit to be received by working an additional year (salary plus additional
pension accruals less foregone retirement benefits).

In “Beliefs and Actions: Expectations and Savings Decisions by Older Americans”,
Harold Elder and Patricia Rudolph explore the interesting question of the inter-relationship
between savings behavior, pension plan participation, and expectations with respect to
retirement standard of living. Their finding that individuals consider personal savings and
pension plan savings to be substitutes is an important explanation for low savings rates in
light of the increasing numbers of defined contribution plans and their financial performance
over the last decade. However, the fact that individual saving, but not pensions, is found to
have an affect on expected standard of living in retirement may imply that individuals do not
fully understand the value of private pensions.

In light of social security reform proposals that suggest creation of individual investment
accounts and/or investment of social security trust fund in equities, several papers in this
issue are particularly interesting. Although previous studies have suggested that stocks
generally have outperformed bonds in the long run, common wisdom has argued in favor of
reducing equity exposure as retirement nears. In “The Asset Allocation Decision in Retire-
ment: Lessons From Dollar-Cost Averaging,” Premal Vora and John McGinnis consider the
retirement consumption effect of stock versus bond investing during the retirement period.
Employing a “dollar-cost disinvesting” methodology, they show that retirees over that last
several decades would have consistently done better by investing in stocks.

However, it is clear from the other papers in this issue that actual investment decisions by
individuals may not produce optimal retirement outcomes. Jack VanDerhei and Kelly Olsen
use a unique database which includes information on nearly thirty thousand 401(k) plans and
more than six million participants in “Social Security Investment Accounts: Lessons from
Participant Directed 401(k) Data” and apply their findings to an analysis of the advisability
of giving investment control over social security accounts to individual participants. Based
on recent investment decisions by 401(k) participants, they conclude that a large percentage
of individuals are very conservative in their investment choices, a finding that is consistent
with that of Doug Waggle and Basil Englis who examine Individual Retirement Account
investments in their article “Asset Allocation Decisions in Retirement Accounts: An All-or-
Nothing Proposition.” Their results, based on a large survey sample of consumers, suggest
that many individuals are totally undiversified and that a large percentage have their IRAs
invested entirely in cash.

Whether or not individuals can be expected to optimally invest their individual social
security accounts, there are potentially large macroeconomic spillover effects from shifting
payroll taxes to equities. In “Social Security Reform: The Effect of Investing in Equities,”
Erick Elder and Larry Holland provide a convincing argument that shifting social security
funds from government securities to equities implies a decrease in the return on equities, an
increase in bond yield and ultimately an increase in general income taxes.

The final paper in this issue provides an interesting analysis of an alternative retirement
savings vehicle. In “An Analysis of the Medical Savings Account as an Alternative Retire-
ment Savings Vehicle,” J. Tim Query suggest that, while the medical savings account is not

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a substitute for traditional retirement savings vehicles and pensions, individuals with low
expected medical expenditures could accumulate significant account balances by the time of
retirement.

Vickie L. Bajtelsmit
Department of Finance and Real Estate

Colorado State University
Fort Collins, CO 80523, USA

viiV.L. Bajtelsmit / Financial Services Review 9 (2000) v–vii