Academic journal article Social Security Bulletin

Contributory Retirement Saving Plans: Differences across Earnings Groups and Implications for Retirement Security

Academic journal article Social Security Bulletin

Contributory Retirement Saving Plans: Differences across Earnings Groups and Implications for Retirement Security

Article excerpt

This study examines how earnings levels affect workers' access to, participation in, and contributions to defined contribution retirement plans. To what extent do these outcomes improve with higher earnings? Did the relationships change between 2006 and 2012? We match a nationally representative sample of Survey of Income and Program Participation respondents to data from their W-2 tax records. We find that access, participation, and contributions increase as earnings increase, even after controlling for key socioeconomic and labor-market covariates. Low earners are less likely to be offered a plan and to participate when one is offered, and they tend to contribute a smaller share of their earnings when participating. We also find that the earnings gradient changed little between 2006 and 2012, despite changing economic conditions.


In the United States, workplace pensions are a primary mode of retirement saving (Hardy and Shuey 2000; Herd 2009; O'Rand 2011; Poterba 2014; Shuey and O'Rand 2004; Warner, Hayward, and Hardy 2010). Because Social Security monthly benefits typically replace around 40 percent of monthly preretirement earnings, workers who wish to maintain their current standard of living after retiring must accumulate resources by other means; yet studies document low retirement saving levels (Fisher and others 2009; Knoll, Tamborini, and Whitman 2012). Estimates based on the 2013 Survey of Consumer Finances indicate that 41 percent of American households headed by individuals aged 55-64 have no savings in retirement accounts. Even more striking is the sharp variation by household income. The proportion of households headed by individuals aged 55-64 that have any retirement savings ranges from 9 percent in the lowest income quintile to 68 percent in the middle quintile and to 94 percent in the top quintile (Government Accountability Office 2015, Tables 1 and 3).

In recent decades, the dominant type of private pension offering shifted from traditional defined benefit (DB) plans to defined contribution (DC) plans such as the familiar 401(k). DC plan contributions today represent the primary means of private retirement saving among American workers. In this context, it has become increasingly important to understand who has access to DC retirement plans, who participates in them, and how much the participants contribute to them (Shuey and O'Rand 2004; Ekerdt 2010; Dushi and Iams 2015; Miller 2015; Tamborini and Purcell 2016).

In this article, we attempt to advance the understanding of how U.S. workers prepare for retirement by examining how DC pension savings vary across the earnings distribution and whether those patterns have changed in recent years. Specifically, we investigate the extent of an earnings gradient in access to, participation in, and levels of contribution to DC retirement plans. Do these three outcomes increase at the upper levels of the earnings distribution? This question is important because the connection between earnings and pension savings is likely to be a key factor influencing retirement resource accumulation during one's working life. Further, the increasing prevalence of DC-type plans is likely to have broadened the relationship between earnings and pension savings. In contrast with DB plans, which are generally mandatory and funded mainly by employers, DC plans are voluntary and require workers to decide what portion of their earnings to contribute; that is, to decide how much of today's consumption to give up for consumption in retirement. Consequently, a worker's earnings level is likely not only to be a major determinant of access to a DC plan but also to influence participation and contribution decisions.

Although a rather extensive literature examines why people save and how saving affects retirement wealth (for example, Poterba, Venti, and Wise 1998, 2000; Venti and Wise 1999), few studies have analyzed the extent of an earnings gradient in contributory retirement plans. …

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