Research articles for the 2019-11-16

Fully Funded Pensions
Forman, Jonathan Barry
SSRN
At retirement, workers want to have enough income to support themselves throughout their retirement years. In that regard, financial planners often suggest that retiring workers should aim to replace 70 to 80 percent of their annual preretirement earnings. Social Security benefits typically replace around 35 percent of the typical worker’s preretirement earnings, and the purpose of this Article is to show how pensions could and should be designed to replace, say, 40 percent of the typical worker’s preretirement earnings throughout her retirement years. In particular, because so many public and private pension plans are underfunded, this Article is focuses on how to fully fund those pensions.At the outset, Part II provides an overview of Social Security, pensions, annuities, and other lifetime income mechanisms. In particular, Part II explains how Social Security works, how traditional pensions work, and how newer 401(k) plans and individual retirement accounts (IRAs) work.Part III then focuses on funding issues for Social Security and pensions. In particular, Part III shows that the Social Security system is currently underfunded by at least $13.9 trillion, that State and local government pension plans are currently underfunded by at least $4.7 trillion, that the U.S. government’s civilian pensions are currently underfunded by at least $911 billion, and that the U.S. government’s military pensions are currently underfunded by at least $767 billion. Part III also shows that private-sector pensions are also severely underfunded. In that regard, traditional defined benefit pensions are currently underfunded by at least $553 billion. Moreover, Part III shows that most workers with 401(k) plans or individual retirement accounts (IRAs) are not saving anywhere near enough to have pensions that could replace 40 percent of their preretirement income; and many workers have no retirement savings of any kind.Part IV then looks at some basic compound-interest and pension mathematics, and Part V explains pension benefit accrual and funding in traditional defined benefit plans. First, Part V.A develops a model, traditional defined benefit plan; and Part V.B then shows how that model defined benefit plan could provide a typical retiree with a pension that would replace 40 percent of her preretirement earnings. Part V.C then uses that model defined benefit plan to explain and compare the various mechanisms that are currently used to fund such traditional pensions, including everything from the pay-as-you-go method to the principal actuarial cost methods that are used to prefund those traditional pensions.Part VI then looks at benefit accrual and funding in defined contribution plans (and IRAs). Part VI develops two alternative model plans that could replace 40 percent of a typical worker’s preretirement earnings. For these model plans, the idea is for the worker to save enough money in her individual account by age 65 so that she could then buy a lifetime annuity that would replace 40 percent of her preretirement earnings.Part VII then expands the defined benefit and individual account models to address some of the most important problems of providing pensions in the real world, including, for example, the problem of postretirement inflation. Part VIII then offers some recommendations about how to redesignâ€"and fully fundâ€"real-world defined benefit plans, defined contribution plans, and IRAs; and, finally, Part IX offers some concluding remarks.

Peer Review Mandates and CPA Entrepreneurship
Vetter, Felix
SSRN
I study how mandatory peer review affects CPA entrepreneurship â€" that is, CPAs’ decisions to start, continue, or cease operating their own CPA firms. In an effort to promote quality, CPA firms have to monitor each other to meet licensing requirements. While peer review is the main oversight mechanism for CPA firms without public clients, little is known about its consequences. I exploit the staggered introduction of peer review mandates and, using a novel dataset based on CPA licenses, find that CPA entrepreneurship declines with the introduction of peer review mandates, as evidenced by declines in CPA firm formation rates and increases in CPA entrepreneur exits. Exits are pronounced for young female CPA entrepreneurs but not for low-quality or non-white CPA entrepreneurs. Collectively, the findings suggest that differences in the costs of meeting licensing requirements rather than screening on quality or group favoritism explain the observed heterogeneity in exits effects.