Academic journal article Social Security Bulletin

Assessment of Retirement Plan Coverage by Firm Size, Using W-2 Tax Records

Academic journal article Social Security Bulletin

Assessment of Retirement Plan Coverage by Firm Size, Using W-2 Tax Records

Article excerpt

We use data from a Census survey merged with W-2 tax records to examine the extent of respondents' reporting error regarding retirement plans among private-sector workers by firm size. We find substantial reporting error with respect to both offer and participation rates in a retirement plan. About 14 percent of workers who self-reported nonparticipation in a defined contribution (DC) plan had contributed as indicated by W-2 records, whereas 9 percent of workers self-reported participation in a DC plan when W-2 records indicated no contributions. There is little difference in reporting error by firm size, however. Interestingly, although substantial differences exist in pension coverage and participation by firm size, employees in small firms are not that different with respect to take-up of pension plans than their counterparts in large firms. Finally, after correcting for reporting error, a substantially larger proportion of workers in small firms have access to some type of pension than commonly believed based on survey reports.

Selected Abbreviations

DB defined benefit

DC defined contribution

IRA individual retirement account

SIPP Survey of Income and Program Participation

SSA Social Security Administration


The primary challenge of both researchers and policymakers interested in retirement security is to better understand how to expand pension coverage so that more workers have enough income in retirement to avoid sharp drops in their living standards. Kobe (2010), using data from the Census Bureau's 2006 Survey of Income and Program Participation (SIPP), found that about 58 million private-sector workers (47 percent) do not have access to any type of retirement plan through their workplace. Moreover, an additional 20 million workers (16 percent) do not participate in the plans their employers offer. Almost three-quarters of private-sector workers in small firms with fewer than 100 employees have no retirement plans available compared with about a quarter of workers in larger firms with 100 or more employees. In contrast, conditional on the employer offering a retirement plan, the take-up rate of workers in small and large firms is essentially the same-about 70 percent (Kobe 2010). These substantial differences by firm size suggest that probably the most significant step that can be taken is to make it easier for small firms to provide some sort of retirement plan to their employees.

Policymakers have implemented many options to help small businesses overcome some of the obstacles of sponsoring retirement plans. Unfortunately, despite their availability for many years, these simplified options (for example, Simplified Employee Pension (SEP) plans and Savings Incentive Match Plans for Employees (SIMPLE)) have produced only minor gains in plan sponsorship (Kobe 2010). The Obama administration has proposed new policies to expand retirement savings. It is estimated that through a program of automatic individual retirement accounts (IRAs), approximately 75 million workers not currently offered a plan at work would be able to save through automatic IRAs (Iwry and John 2007). Under the proposal, employers with more than 10 employees and who are in business for at least 2 years, not currently offering a pension plan, would be obligated to allow their employees the use of the payroll system to direct their earnings to an IRA and would also be obligated to automatically enroll their employees.

A second issue of great importance is plan participation because any policy would not be effective if employees do not participate in the offered plan. In other words, even if all eligible employees under the new automatic IRA were offered such a plan, it is of interest to know what percentage of workers would take up the offer. Although we cannot predict this with certainty, evidence from existing defined contribution (DC) plans may at least be suggestive of what the take-up of such plans would be. …

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