Welcome to the Conference

Robert A. Brown, President, Boston University

Cathy E. Minehan, President and CEO, Federal Reserve Bank of Boston

Katy Sherrerd, Executive Director, Research Foundation of CFA Institute

Dinner

 

Introduction:

Zvi Bodie, Boston University

 

Keynote Address:

Paul A. Samuelson, "Is Personal Finance a Science?

Opening Remarks

Louis E. Lataif, Dean, School of Management, Boston University

The Theory of Optimal Life-Cycle Saving and Investing
How much should a family save for retirement and the kids' college education, and how much insurance should they buy for health care, disability, long-term care, and other contingencies? What should a company choose as the default asset allocation for a mandatory retirement saving plan? Bodie, Treussard, and Willen believe that economic theory provides guidance for making such decisions. The modern theory of household financial planning as developed by Fisher, Modigliani, Duesenberry, Arrow, Debreu, Samuelson, Merton, and others provides the right analytical framework and key insights. Recent work has extended the theory to account for real-world problems such as borrowing and short-sale constraints, illiquid and non-tradeable assets and transactions costs. But a gap still remains between what people do and what theory says they should do -- a gap the authors attribute partially to the institutional and intellectual complexity of our theoretically optimal plans. Many of these shortcomings can be addressed by innovative financial products made feasible by recent advances in financial technology. One question remains though: Will existing providers of financial services be the ones to innovate further or will new institutions be needed?

Moderator:

Jerome Detemple, Boston University

 

 

Presenters:

Zvi Bodie, Boston University

Jonathan Treussard, Boston University

Paul Willen, Federal Reserve Bank of Boston

Paper

Discussants:

Philip H. Dybvig, Washington University
Presentation

Deborah Lucas, Northwestern University
Presentation

General Discussion

10:15 a.m.

Can Personal Investing Be Rational?
Economic theorists have long explored how people should rationally make life-cycle saving and investment decisions. But how do people actually behave in the real world? In this second session we will focus on the insights gained from studies of observed behavior. How can we explain systematic deviations from rational saving and investing decisions? What features can designers of financial products incorporate that most effectively correct irrational behavior? To what extent can product and program features improve households' well-being and retirement security? For instance, behavior tends to exhibit inertia: Employees tend to accept the default options in voluntary employee benefit programs. If a firm's 401(k) plan default is to enroll new hires automatically or require them to make a choice, the fraction of employees enrolled will be much higher than if the plan default is non-enrollment. Based on this finding, some firms have changed their plan design to either automatic enrollment or compulsory choice. What, then, should the default investment option be for employees who, for whatever reason, are unable to make a choice?

Moderator:

Christina Wang, Federal Reserve Bank of Boston

 

Presenter:

David Laibson, Harvard University
Paper
Presentation

 

Discussants:

Jeffrey Brown, University of Illinois, Urbana
Presentation

James Poterba, Massachusetts Institute of Technology
Paper
Presentation

General Discussion

Lunch

Practical Models for Life-Cycle Financial Planning
Do online interactive financial planning models really help people in deciding how much to save, to insure, and to invest in stocks and other asset classes? These models vary in complexity and in level of detail. Many are available for free at the websites of financial institutions. The simplest are "calculators" that tell the user how much to save each year at an assumed rate of return in order to accumulate a desired future sum at an assumed retirement date. They make doing sensitivity analysis quick and easy. The more ambitious ones perform Monte Carlo simulations and take into account a relatively large number of factors, including household size and composition, income, wealth, desired retirement date, expected inflation rate, attitude towards risk, etc. In his presentation, Kotlikoff analyzes several representative models from the perspective of economic theory and finds most of them seriously deficient. He explores how they might be improved.

Moderator:

Nalin Kulatilaka, Boston University

 

Presenter:

Laurence Kotlikoff, Boston University
Paper

 

Discussants:

John Turner, AARP
Paper (updated November 2006)
Presentation

George Chacko, Integrated Finance Limited

General Discussion

Break

Innovative Retirement Income and Old-Age Insurance Products
As retirement approaches, long term care insurance and annuity products can be used by consumers and financial advisers to manage the financial and health risks of old age. This panel will discuss current market conditions and the role of insurance and annuity products in meeting the needs of the baby boomer generation. How important is guaranteed lifetime income? What role will annuities play? The panel will review current and near-term products, highlighting recent improvements in product design. What innovations in product design are still needed? How do the risks inherent in these products (such as interest rate, aggregate mortality/longevity, and birth cohort) impact insurer innovation? What other obstacles exist? The panelists will discuss these questions as they address how the marketplace is evolving and some of the regulatory and environmental impediments to innovation.

 

Moderator:

Cynthia Martin, Federal Reserve Bank of Boston

 

Panelists:

Francois Gadenne, Retirement Income Industry Association
Paper
Presentation

Jerome Golden, MassMutual
Paper
Presentation

Anna Rappaport, AR Consulting
Paper
Presentation

Mark Warshawsky, Watson Wyatt
Paper
Presentation

General Discussion

Cocktail Reception

Dinner

 

Moderator:

William Samuelson, Boston University

 

Dinner Address:

Robert C. Merton, Harvard University,
"The Future of Personal Finance"

Continental Breakfast

The Role of Government in Life-Cycle Saving and Investing
The U.S. government, like governments in virtually all developed countries, supports household saving through social insurance programs and tax incentives. The Social Security system compels people to contribute over their working lives so that they can have a base of income in retirement. This system counterbalances the widespread myopia with regard to retirement income needs and ensures those with the lowest levels of income enough to survive in retirement. For middle and higher-income individuals, the government encourages employer-based group savings through favorable tax provisions accorded pension saving. The tax code allows businesses and individuals to take an immediate deduction for contributions to either a defined benefit or defined contribution plan and does not levy a tax until the monies are paid out in retirement. Finally, it is increasingly evident that home equity will be called upon as a source of income in retirement, and saving through this asset is also highly subsidized under the tax system. Imputed rent is not included in taxable income, but the expenses of owning a home, such as mortgage interest, are deductible. This paper will look at the rationale, costs, and benefits of each component of government support for life-cycle saving.

Moderator:

Jeffrey C. Fuhrer, Federal Reserve Bank of Boston

 

Presenter:

Alicia H. Munnell, Boston College, Retirement Center
Paper
Presentation

 

Discussants:

Lans Bovenberg, Netspar, Tilburg University, Netherlands
Paper
Presentation

 

John Shoven, Stanford University
Presentation

 

 

General Discussion

Break

Session 6
10:30 a.m.-12:00 p.m.

What Everyone Should Know About Saving and Investing
What can be done to enable households to make more rational financial decisions? What should be the content of the educational materials provided by government and other not-for-profit organizations? Who should decide about the content? Is there a unique role for universities to play? Should radio and television broadcasters be encouraged to air a certain amount of financial literacy education programming for all age categories? Should the financial services industry and/or government fund such programming? These are some of the questions to be addressed in this final panel discussion.

Moderator:

Paul Solman, PBS The Newshour

 

Panelists:

David Blitzstein, United Food and Commercial Workers

Zvi Bodie, Boston University
Presentation

Jeffrey Diermeier, CFA Institute
Presentation

Dallas Salisbury, Employee Benefits Research Institute
Presentation