Notes from the Editor about the 1995 Issue

Sherman Hanna, Ohio State University

This sixth issue of the journal includes 17 articles. The first six articles are related to
retirement planning and pensions. As the U.S. Baby Boom generation born between
1946 and 1962 begins to come within 15 years of retirement, the nation’s focus on that
topic will increase, just as the previous interests of that generation dominated the national
agenda at various times in the past, starting with the overcrowded schools of the 1950’s.
Those who started investing for retirement at an early age, or who were lucky enough to
have an employer with a generous pension plan and stayed with that employer for several
decades, have little to worry about. (Whether a worker has a defined benefit or defined
contribution plan has some impact, as Woerheide shows.) However, as Malroutu and
Xiao show, only 39% of a sample of preretirees working full-time thought that their
retirement income would be adequate.

Ironically, those who have worked for low wages, but worked steadily until age 65,
should have little to worry about. The replacement rates offered by the U.S. Social
Security System for workers with below average wages are very high, and thus, under the
current benefit structure, there will be relatively small drops in levels of living of low
wage workers. Despite the predictions of doom, I believe that the basic structure of the
Social Security pension system is unlikely to change for workers over the age of 40. One
only has to consider the political power of the elderly now, before the huge increase in
the numbers of the elderly that will start in the year 2011, to conclude that no
fundamental reduction in benefits will take place.

Workers who currently make more than $20,000 per year, especially those lacking a
defined benefit pension plan or who cannot work for the same employer for more than
10 years, face a daunting challenge, however. The calculations (e.g., Morgan; Newmark
& Walden, this issue) are complex even if simplifying assumptions are made. As Morgan
illustrates, the sacrifice from current consumption that must be made to provide for
retirement is much less if one starts saving early. One difficulty in most hand calculation
methods, such as that presented by Morgan, is that one must assume that income between
now and retirement is steady. With increasing income, or fluctuating income,
calculations become very complex. Fortunately, there is a computer program that can
handle a considerable amount
of complexity, and calculate a spending and saving plan from a young age until retirement. Some of
the assumptions behind this program are described in Hanna, Fan and Chang.

Part of an adequate preparation for retirement is investing aggressively. One common mistake by those
who do try to prepare for retirement is investing conservatively. DeVaney analyzes factors related to
whether households had investment assets equal to at least 25% of net worth. While this is only one
aspect of retirement preparation, it can make a big difference, as those who stick to money market
accounts and certificates of deposit will almost certainly have a substantially lower level of living in
retirement than they could have if they had invested in diversified stock funds.

A variety of other topics are included. Not all of the articles represent original research reports. The
articles by Morgan and by Newmark and Walden constitute original analyses and methods of
presentation by authors with considerable experience in writing for a variety of audiences over the years.
I have received some submissions to this journal that seemed little more than quickly edited lecture
notes. I believe that these two articles have a reasonable level of scholarly background, and represent
a useful contribution to the field. I would be interested in receiving comments from readers about the
appropriateness of such articles.

Seven articles in this issue contain empirical analyses of the U.S. Survey of Consumer Finance. This
brings the total number of articles in this journal that have used on of the Surveys of Consumer Finance
to 14. Despite some limitations, the surveys sponsored by the Federal Reserve Board have been very
useful in providing insights into family financial behavior. I expect that next year’s issue may contain
at least one article based on the 1992 Survey of Consumer Finance.

Zhong and Xiao used the 1989 Survey of Consumer Finance to investigate holdings of bonds and
stocks. They found that, controlling for income and other variables, whites were more likely to hold
these investment assets than similar nonwhites. The article by Xiao shows similar results. These
studies provide additional importance for the work of financial educators in trying to reach a diverse
audience. Those who avoid investing aggresively for the long run because of a misunderstanding of
the nature of investment risk face a much lower level of living in retirement than would otherwise be
possible. Additional studies of family portfolio decisions, using more sophisticated econometric
methods, are needed to provide better understanding ot the differences in investment behavior among
different demographic groups. I believe that it is no enough, however, to simply accept differences as
due to differences in preferences. Overly conservative investment behavior must be based on lack of
education, as the greater risk is not accumulating enough for a long retirement because of timid
investing. As Lee and Hanna show, in the context of total wealth, including human wealth, investment
portfolios are very small, and thus, young families might rationally put retirement fund contributions
in investments that have high rates of reutrn.

Housing is an important part of family budgets. As Oh shows, U.S. households who rent are facing
greater rent burdens today than in the past. Many families who rent have difficulty getting their budgets
controlled so that they can successfully become homeowners. Shelton and Hill present research on an
educational program that seems to help familes prepare for homeownership.