Household savings and portfolio choice
Author(s)Klein, Sean Patrick
Massachusetts Institute of Technology. Dept. of Economics.
James Poterba and Amy Finkelstein.
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This thesis consists of three essays that examine household savings and portfolio choice behavior. Chapter One analyses the effects of employer matching contributions and tax incentives on participation and contribution behavior in employer-sponsored 401(k) savings plans. Employer sponsored retirement savings plans consist of several different incentives designed to increase employee savings, including matching contributions, tax deductibility, and tax free compounding. There is a substantial literature on the effects of match rates on retirement savings, but little on the effects of preferential tax treatment. This chapter provides estimates of the impact of employer matching and tax deductibility on retirement savings using a uniquely suited dataset from a large United States Corporation. I estimate that the effect of a one percentage point change in the match rate corresponds to a 0.06 percentage point increase in savings plan participation rates, while a similar one percentage point increase in marginal tax rates increases participation by 1.35 percentage points. Changes in the match rate have an insignificant effect on contribution rates (conditional on participation), though a one percentage point change in marginal tax rates tends to increase contribution rates by 0.16 percentage points. The effects of the match rate and marginal tax rate are transformed into changes in the annualized rate of return of the savings plan and this disparity remains.(cont.) Finally, these estimates are used to calculate the changes in wealth at retirement due to changes in match rates and marginal tax rates under a variety of parameterizations. Chapter Two examines the trading and contribution behavior of employees participating in the 401(k) plan at a large United States corporation. This corporation offers employer matching contributions in company stock, and employees are prohibited from trading the matching contributions for an extended period. The empirical work details evidence of rebalancing behavior that is impacted by vesting restrictions and within-firm variation in match rates. Employees are between 3 and 7 percentage points more likely to rebalance their retirement portfolio once matching contributions have fully vested, and an additional 6 to 11 percentage points more likely if they face a 100% match rate relative to a 50% match rate. Variation in match rates also leads to changes in composition of employee contributions: increases in the match rate lead to decreases in the amount of company stock that the employee purchases with their own funds. Employees are between 13 and 19 percentage points less likely to contribute their own income to the matched asset and, if they still contribute to company stock, the employee's own-money contributions in company stock fall by between 13 and 18 percentage points. Together, these estimates provide evidence that employee contribution and rebalancing behavior is altered by asset-specific matching contributions and by restrictions on the trade of particular assets.(cont.) Chapter Three uses data from multiple panels of the Survey of Income and Program Participation to identify the effect of unemployment insurance benefits on household savings behavior. This chapter extends existing literature on precautionary savings and insurance to allow for the fact that insurance benefits are multi-dimensional, including replacement rates and benefit durations; incorporates additional econometric methods to accommodate the skewness and variation in household savings; allows for heterogeneous savings responses based on the likelihood of the insured risk through a two-step estimation procedure; and by allowing insurance benefits to affect the level and composition of assets by analyzing changes in the composition of the household's portfolio across assets that are likely (or unlikely) to represent precautionary savings. I find suggestive evidence of quantitatively large reductions in precautionary savings behavior in response to variation in both replacement rates and benefit durations, though these results are not statistically distinguishable from zero. The negative effect of benefit increases on savings is magnified for households at greater risk of unemployment, and for the households with below median levels of financial wealth, though again these results are statistically insignificant once standard errors are properly adjusted. These extensions do not provide enough power to detect savings responses to variation in insurance benefits at standard levels of confidence, despite point estimates that represent economically large responses.
Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2010.Cataloged from PDF version of thesis.Includes bibliographical references.
DepartmentMassachusetts Institute of Technology. Dept. of Economics.
Massachusetts Institute of Technology