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Contribution dynamics in defined contribution pension plans during the great recession of 2007-2009
Irena Dushi1, Howard M Iams, Christopher R Tamborini
1Office of Policy Evaluation and Modeling, Office ofResearch, Evaluation, and Statistics, Office of Retirement and Disability Policy, Social Security Administration, USA.
Social Security Bulletin
|August 7, 2013
Summary
The Great Recession significantly impacted defined contribution (DC) plan participation and contributions. Workers experiencing earnings decreases were more likely to reduce or stop contributions, highlighting economic downturn effects on retirement savings.
Area of Science:
- Economics
- Labor Economics
- Retirement Savings
Background:
- Defined contribution (DC) plans are a primary retirement savings vehicle for many workers.
- Economic downturns can significantly affect household finances and long-term financial planning.
- Understanding the impact of the Great Recession on retirement savings behavior is crucial for policy and individual guidance.
Purpose of the Study:
- To investigate the effects of the 2007-2009 Great Recession on workers' participation and contribution levels in defined contribution (DC) plans.
- To analyze the relationship between earnings changes and changes in DC plan contributions during the recession.
- To compare contribution behavior during the recessionary period with pre-recession trends.
Main Methods:
- Utilized longitudinal data by matching W-2 tax records with the Survey of Income and Program Participation (SIPP).
- Analyzed a nationally representative sample of US workers.
- Compared contribution changes for participants before (2005-2007) and during (2007-2009) the Great Recession.
Main Results:
- A significant portion (39%) of 2007 DC plan participants decreased their contributions by over 10% during the Great Recession.
- Workers experiencing earnings decreases >10% were substantially more likely to stop contributing (30% vs. 9%) and reduced contributions more significantly (-$1,839 vs. -$129) compared to those with stable earnings.
- The rate of contribution decrease or cessation was higher during the Great Recession than in the preceding period (2005-2007).
Conclusions:
- The Great Recession had a considerable negative impact on workers' participation and contribution levels in defined contribution plans.
- Earnings volatility during economic downturns strongly influences decisions to reduce or halt retirement savings contributions.
- Retirement savings behavior is sensitive to macroeconomic conditions, necessitating supportive policies during economic crises.
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