Academic journal article Social Security Bulletin

Defined Contribution Pension Participation and Contributions by Earnings Levels Using Administrative Data

Academic journal article Social Security Bulletin

Defined Contribution Pension Participation and Contributions by Earnings Levels Using Administrative Data

Article excerpt

Many observers question how the shift from defined benefit (DB) to defined contribution (DC) retirement plans affects workers with different compensation levels. To advance the empirical basis for understanding pension outcomes, this article estimates DC plan participation and contribution rates in 2006 both by the worker's current earnings and by the annual average of real earnings over the 10-year period 1997-2006. Using earnings data from W-2 tax records linked to data from the Census Bureau's Survey of Income and Program Participation, we find that workers in the lower part of the earnings distribution are less likely to participate in a DC plan, and the contribution rates for those who do participate are lower than those for workers with higher earnings.

Selected Abbreviations

DB defined benefit

DC defined contribution

SSA Social Security Administration

SIPP Survey of Income and Program Participation

Introduction

The shift from defined benefit (DB) pension plans to defined contribution (DC) retirement savings plans over the past three decades is well documented (Munnell and Sundén 2004; Wiatrowski 2004; Purcell 2005; Dushi and Iams 2008). In essence, this change shifts the investment decisions and risks from the employer to the employee and exposes employees to longevity risk; that is, the possibility of running out of money in retirement (Munnell and Sundén 2004). Although employers commonly enroll all eligible employees in DB plans, most DC plans require employees to choose to participate. One reason why employees usually must opt into a DC plan is that two-thirds of private employers require employees to contribute part of their own earnings into the plan (BLS 2010, Table 8). This development has led to important changes in the distribution of workers participating in a pension plan. Observers question how the shift from DB to DC retirement savings plans affects workers across different economic and sociodemographic subgroups (Huberman, Iyengar, and Jiang 2007; Ghilarducci 2008). Previous research provides evidence that low-income workers are less likely to be eligible for a DC plan and less likely to participate when eligible (Bassett, Fleming, and Rodrigues 1998; BLS 2010; Papke 2004; Munnell and Sundén 2004, 2006). As DC plans supplanted DB plans over the past three decades, the participation rates among low-income workers decreased by one-third (Karamcheva and Sanzenbacher 2010, 2). Such unequal distribution of pension participation would imply greater inequality in retirement resources of future retirees.

Despite growing research and policy attention, studies using nationally representative data to examine variations in DC plan participation and contribution rates by earnings level are relatively limited. One important issue not previously addressed is whether using a longer period, such as a decade, to measure earnings provides a better representation of pension outcomes for low earners than a short-term measure does. One year of earnings may not be representative of a worker's lifetime earnings. For example, during an economic downturn, a job loss or a job change may produce a relatively anomalous earnings level in 1 year of cross-sectional data and may consequently affect participation in and contributions to DC plans.

Previous research that examined determinants of DC plan participation and contributions primarily used survey-reported cross-sectional data (Bassett, Fleming, and Rodrigues 1998; Papke 2004; Munnell and Sundén 2004, 2006; Purcell 2009). Consequently, the literature relies on self-reported information on participation and contributions. One exception, a study by Joulfaian and Richardson (2001), uses federal income tax data from 1 year (1996) and finds that low earners are not only less likely to participate, they also have lower contribution rates than high earners. Although useful, self-reported information about DC plan participation and contributions is subject to substantial measurement errors (Dushi and Iams 2010). …

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