The Impact of Response Error on Participation Rates and Contributions to Defined Contribution Pension Plans

By Dushi, Irena; Iams, Howard M. | Social Security Bulletin, January 1, 2010 | Go to article overview

The Impact of Response Error on Participation Rates and Contributions to Defined Contribution Pension Plans


Dushi, Irena, Iams, Howard M., Social Security Bulletin


The accuracy of information about coverage and contributions to defined contribution (DC) pension plans is important in understanding the economic well-being of future retirees because these plans are an increasingly important part of retirement income security. Using data from the 1996 and 2004 panels of the Survey of Income and Program Participation (SIPP) merged with information from W-2 tax records, we examine the extent to which estimated participation rates and contribution amounts to DC plans derived from SIPP reports differ from estimates obtained from tax-deferred contributions in the W-2 tax records. Findings indicate that the participation rate in DC plans is about 11 percentage-points higher when using W-2 tax records rather than survey reports. The analysis of possible sources of reporting error regarding plan participation indicates that an error is more likely to occur when missing data are imputed by the Census Bureau than in actual reports by respondents.

Introduction

It is a well-known fact that employer-provided pension plans have shifted from traditional defined benefit (DB) plans, where the employer bears most of the risks of providing retirement benefits, toward defined contribution (DC) plans, where the employee bears all the risks (Munnell and Sunden 2004).1 DB pensions provide retirement benefits based on a formula typically involving the final salary, age, and years of service. In contrast, DC pensions are tax-deferred savings accounts where employer and employee contributions into the account are invested, and retirement income depends on the account balance at retirement. The shift from DB to DC pensions has been identified with different data sources such as the Bureau of Labor Statistics' National Compensation Survey (Costo 2006); Form 5500 employer submissions to the Department of Labor (Kruse 1995; Turner and Beller 1989, 1992; Gustman and Steinmeier 1992; Employee Benefit Research Institute 1993; Rajnes 2002; Buessing and Soto 2006); and household surveys (Gustman, Steinmeier, and Tabatabai 2009; Dushi and Iams 2008; Purcell 2005, 2009; Copeland 2005, 2009; Verma 2006).

Many studies have used household survey data, in particular the Census Bureau's Survey of Income and Program Participation (SIPP), to assess participation in and contributions to DC plans for the entire labor force. Purcell (2005, 2009) and Copeland (2005, 2009), for example, use SIPP data to examine both DC plan participation and contributions. An advantage of SIPP data is the availability of pension plan coverage by type of plan for the entire labor force, which allows one to study its relationship with several socioeconomic and job characteristics. However, as is the case with many household survey data, there is the issue of reporting error. If SIPP-reported information about DC pension plans is incorrect, then trends in participation and contributions may be measured inaccurately and thus projections about future coverage and account balances in such plans may also be incorrect. Furthermore, parameter estimates of the determinants of participation and contributions to DC plans may as well be biased or inconsistent.

One approach used to assess the validity of respondents' reports regarding their pension type is to merge survey reports with employers' pension information. Previous research (Mitchell 1988; Gustman and Steinmeier 1989, 2004) has shown that a respondent's reports of plan type and plan characteristics often differ from those obtained from the employer's pension summary plan description (SPD).2 Those analyses assume correct matching of employer plans to survey respondents and accuracy of the employer plans in representing the respondent's retirement plan. Rohwedder (2003) argues that inconsistencies may arise from errors with employer-reported data and the process of matching employer data to a particular respondent. Alternatively, one can rely on pension reports of those reaching retirement because the respondent report on pensions would be more salient when people are about to retire or have recently retired (Chan and Stevens 2004; Hurd and Rohwedder 2007). …

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