Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
401(k) Participant Behavior in a Volatile Economy Prepared for the 14th Annual RRC Conference, August 2, 2012 by Barbara Butrica and Karen Smith 1 Background • DC pensions have become the dominant employer-provided pension type over the last several decades. • Compared with DB pensions, DC pensions force workers to take charge of their retirement investments. • Whether to participate • How much to contribute • What to invest in and how much 2 What happens to 401(k) contributions in a volatile economy? • Three recessions • Early 1990s (oil price shock) • Early 2000s (collapse dot-com bubble, and 9/11) • Late 2000s (stock market crash, housing collapse, and Great Recession) • Volatility • Stocks, housing, employment 3 Questions • How do workers’ 401(k) contributions respond to economic downturns? • Do they stop contributing to DC pensions? • Do they change their contribution amounts? • Do they change their asset allocation with fluctuations in the stock market? • Do responses vary depending on the size of the downturn? 4 Data • 1996, 2001, 2004, 2008 SIPP • Large representative samples of US households • Includes demographic, economic, and job characteristics • Linked to Detailed Earnings Record (DER) • Includes total earnings 1978-2010 and worker contributions to DC plans 1990-2010 • Sample is person-year file of workers ages 20 to 69 from 1990 to 2010 • 905,381 person-year observations • Over 168,000 individuals 5 Methods • Examine participation of workers by year, age, income (DC contribution>0) • All workers • Workers offered a DC pension (SIPP pension year) • Examine contribution amount among participants by year, age, income • Examine asset allocation from SIPP self-reports • Flows (among contributors) • Assets (among account holders) • Multivariate analysis of participation, contribution amounts, and stock allocation 6 Methods • Particular variable of interest is YEAR • Interested in variation around recessions and stock market crashes. 7 Participation 8 Participation rate among workers ages 20 to 69 increased dramatically over time. . 9 Participation rate declined slightly with the recent recessions. . Drop in participation in 2001 and 2008 recessions 10 Participation rate increased for all workers—particularly those ages 30 to 64. . 50% 50-59 45% 40-49 40% 30-39 60-64 35% Participation Rate 30% 65-69 25% 20-29 20% 15% 10% 5% 0% Year 11 They continued to rise through the recessions for workers ages 60 to 69. . 50% 50-59 45% 40-49 40% 30-39 60-64 35% Participation Rate 30% 65-69 25% 20-29 20% 15% 10% 5% 0% Year 12 And fell sharply following both the 2001 and 2008 recessions for workers ages 20 to 39. . 50% 50-59 45% 40-49 40% 30-39 60-64 35% Participation Rate 30% 65-69 25% 20-29 20% 15% 10% 5% 0% Year 13 The increase in participation rate seems to have plateaued below 50% for workers. . 48% 50% 1966-1970 45% 1961-1965 40% 1956-1960 35% Participation Rate 1951-1955 30% 1946-1950 26% 25% 1941-1945 20% 1936-1940 1931-1935 15% 1926-1930 10% 1921-1925 5% 0% 20-29 30-39 40-49 50-59 Age 60-64 65-69 14 The increase in participation rates seems to have plateaued below 50% for workers. . 48% 50% 1966-1970 45% 1961-1965 40% 1956-1960 35% Participation Rate 1951-1955 30% 1946-1950 26% 25% 1941-1945 20% 1936-1940 1931-1935 15% 1926-1930 10% 1921-1925 5% 0% 20-29 30-39 40-49 50-59 Age 60-64 65-69 15 The increase in participation rates seems to have plateaued below 50% for workers. . 48% 50% 1966-1970 45% 1961-1965 40% 1956-1960 35% Participation Rate 1951-1955 30% 1946-1950 26% 25% 1941-1945 20% 1936-1940 1931-1935 15% 1926-1930 10% 1921-1925 5% 0% 20-29 30-39 40-49 50-59 Age 60-64 65-69 16 Limitation of data • Do not know if worker is offered a DC plan in the DER data. • Do know DC offer at the SIPP pension interview. • Limit the sample to include only workers offered a DC plan. 17 Given an DC offer, two-thirds of workers participate . 100% All Workers 90% Workers Offered Plan 80% 68% Partcipation Rate 70% 67% 65% 59% 60% 55% 50% 40% 72% 71% 41% 38% 45% 47% 38% 30% 26% 22% 20% 10% 0% All 20-29 30-39 40-49 Age 50-59 60-64 65-69 18 Over 40 percent of workers can’t participate because they are not offered a DC plan . 100% 90% 80% 37% 43% 70% 36% 55% 21% 18% Not Offer 42% 62% 60% 50% 36% 19% 18% Offer Do Not Participate 20% 40% 20% 20% 16% 30% 42% 39% 46% 46% 38% 24% 23% 10% Offer and Participate 0% All 20-29 30-39 40-49 Age 50-59 60-64 65-69 19 Participation rate among workers offered a DC plan fell with the Great Recession at all ages. . 80% 70% 68% 71% 67% 65% 65% 59% 60% 72% 67% 68% 65% 65% 56% 55% 51% Partcipation Rate 50% 40% 2006 2009 30% 20% 10% 0% All 20-29 30-39 40-49 Age 50-59 60-64 65-69 20 Contribution Amount • Include only contributors ages 20 to 69. 21 Median contribution amount among participants fell with the Great Recession. $4,000 -9.6% -9.2% DC Contribution Amount (in 2011 dollars) $3,500 -3.4% -6.6% $3,000 -5.4% -6.1% $2,500 2007 $2,000 2008 2009 -6.5% $1,500 $1,000 $500 $0 All 20-29 30-39 40-49 Age 50-59 60-64 65-69 22 Median contribution amount among participants fell with the Great Recession. $4,000 -9.6% -9.2% DC Contribution Amount (in 2011 dollars) $3,500 -3.4% -6.6% $3,000 -5.4% -6.1% $2,500 2007 $2,000 2008 2009 -6.5% $1,500 $1,000 $500 $0 All 20-29 30-39 40-49 Age 50-59 60-64 65-69 23 Median contribution amounts among participants fell with the Great Recession. $4,000 -9.6% -9.2% DC Contribution Amount (in 2011 dollars) $3,500 -3.4% -6.6% $3,000 -5.4% -6.1% $2,500 2007 $2,000 2008 2009 -6.5% $1,500 $1,000 $500 $0 All 20-29 30-39 40-49 Age 50-59 60-64 65-69 24 Median contributions continued to fall through 2010 for younger participants. $4,000 -6.7% -5.1% DC Contribution Amount (in 2011 dollars) $3,500 -4.7% -8.2% $3,000 -5.3% -6.2% $2,500 2007 $2,000 2008 2009 -12.2% $1,500 2010 $1,000 $500 $0 All 20-29 30-39 40-49 Age 50-59 60-64 65-69 25 Median contributions continued to fall through 2010 for younger participants. $4,000 -6.7% -5.1% DC Contribution Amount (in 2011 dollars) $3,500 -4.7% -8.2% $3,000 -5.3% -6.2% $2,500 2007 $2,000 2008 2009 -12.2% $1,500 2010 $1,000 $500 $0 All 20-29 30-39 40-49 Age 50-59 60-64 65-69 26 Median contributions increased in 2010 for older participants, but remain below 2007 amounts. $4,000 -6.7% -5.1% DC Contribution Amount (in 2011 dollars) $3,500 -4.7% -8.2% $3,000 -5.3% -6.2% $2,500 2007 $2,000 2008 2009 -12.2% $1,500 2010 $1,000 $500 $0 All 20-29 30-39 40-49 Age 50-59 60-64 65-69 27 Change in DC Contribution Amount (percent) -1 -3 -4 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Changes in median DC contributions closely align with changes in GDP. 5 4 3 2 1 0 -2 GDP Median Contribution Year 28 Change in DC Contribution Amount (percent) -1 -3 -4 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Changes in median DC contributions closely align with changes in GDP. 5 4 3 2 1 0 -2 GDP Median Contribution Year 29 Multivariate Analysis • Participation • Logistic regression all workers • Control for age, earnings, number of work years since age 20, job change, job loss, SIPP panel, year • Logistic regression workers offered DC plan (duration of pension job at SIPP interview) • Control for age, earnings, number of work years since age 20, job change, job loss, SIPP panel, year • Marital status, change in marital status, spouse employment status, spouse DC contributions, home ownership, number of dependents, having a baby, work limitations, health status, whether the employer contribute to the plan, can borrow from plan. 30 Probability of contributing to DC plan declined with the 2008 recession. (Unadjusted Beta for year) 1 0.9 Participation Beta 0.8 All Workers Workers Offered Pension 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Year 31 Probability of contributing to DC plan declined with the 2008 recession. (Unadjusted Beta for year) 1 0.9 Participation Beta 0.8 All Workers Workers Offered Pension 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Year 32 Multivariate Analysis • Contributions • OLS regression all participants • Control for age, earnings, number of work years since age 20, job change, job loss, SIPP panel, year • OLS regression all participants from 1990-SIPP • Control for age, earnings, number of work years since age 20, job change, job loss, SIPP panel, year • Marital status, change in marital status, spouse employment status, spouse DC contributions, home ownership, number of dependents, having a baby, work limitations, health status, whether the employer contribute to the plan, can borrow from plan. 33 Real DC contributions declined with the 2001 and 2008 recessions. (Unadjusted Beta for year) 600 All Participants 1990-2010 500 Participants 1990 to SIPP 400 300 200 100 0 -100 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 -200 1992 OLS parameter estimate for Year 700 Year 34 Real DC contributions declined with the 2001 and 2008 recessions. (Unadjusted Beta for year) 600 All Participants 1990-2010 500 Participants 1990 to SIPP 400 300 200 100 0 -100 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 -200 1992 OLS parameter estimate for Year 700 Year 35 What does this mean for retirement saving? • Simple simulation • Baseline uses observed median DC contributions for 30-39-year-olds from 2007 to 2010. • Assume 3 percent real growth on accumulations • Assume workers increase annual real contributions by 1 percent each year after 2010. • Alternate uses observed 2007 median DC contribution for 30-39-year-olds. • Assume 3 percent real growth on accumulations • Assume workers increase annual real contributions by 1 percent each year after 2007. • Only difference is the DC contributions for 2008-2010. 36 For a typical 30-year-old, simulated retirement saving is 9.1 percent lower at age 62 because of the recession. Retirement Saving ($2011) DC Contribution ($2011) 3,500 3,000 2,500 2,000 1,500 Baseline 1,000 Alternative Scenario 500 160,000 $142,141 140,000 Baseline 120,000 $130,233 Alternative Scenario 100,000 80,000 60,000 40,000 20,000 0 0 30 35 40 45 50 Age 55 60 30 35 40 45 50 Age 55 60 37 Account holders were less likely to invest in stocks after the 2008 economic melt-down but contribution allocations remained stable Probability of Investing in Equities 70% 60% 64% 59% 52% 50% 49% 50% 53% 40% Contributions 30% Balances 20% 10% 0% 2003 2006 Year 2009 38 Conclusions • Less than half of workers participate in DC plans. • 40 percent don’t participate because their employers don’t offer a plan. • Median contributions are well below the statutory limit. • Workers don’t save adequately even in economic booms. They save less in recessions. 39 Conclusions • Workers do lower DC participation and contributions during recessions. • Lower contributions precede the recession. • Lower participation lags behind the recession. • The Great Recession will lower retirement saving for the typical 30-year-old today by about 9 percent. • The impact is greater for higher-income workers and for workers farther from retirement. • Some evidence that investors buy high and sell low— locking in investment losses. • Financial literacy could improve retirement saving 40