Academic journal article Social Security Bulletin

Retirement Savings Inequality: Different Effects of Earnings Shocks, Portfolio Selections, and Employer Contributions by Worker Earnings Level

Academic journal article Social Security Bulletin

Retirement Savings Inequality: Different Effects of Earnings Shocks, Portfolio Selections, and Employer Contributions by Worker Earnings Level

Article excerpt


This study examines how the accumulated discretionary retirement savings of workers differed by earnings level in the first years after the Great Recession. We look specifically at workers' combined holdings in individual retirement accounts (IRAs), Keogh plans, and, in particular, employer-sponsored defined contribution (DC) plans.1 Analyzing the economic experiences of workers during 2009-2011 reveals that higher earners were more likely to accumulate greater retirement savings than lower earners were. Sixty-four percent of workers at the top of the earnings distribution experienced an increase in retirement savings compared with 56 percent of those at the bottom. Higher earners may have fared better because of more favorable economic and life events and because higher and lower earners exhibit different voluntary contribution behaviors (Gist and Hatch 2014).

This study uses panel data to investigate changes in retirement savings from 2009 through 2011, and the determinants of those changes, by workers' earnings levels.2 Understanding how workers' earnings levels predict their ability to increase their retirement savings could inform changes to DC plan features that might help lower earners save in volatile economic conditions and slow or reverse the growth in the retirement wealth gap.

We report four key findings. First, each instance of annual earnings loss of 10 percent or more through 2009 was associated with a loss of retirement savings of $450 during 2009-2011 for lower earners, while the effect was negligible for higher earners. Second, for every week a worker was not employed during 2009-2011, lower earners lost $55 in retirement savings, but nonemployment spells did not affect higher-earning workers' savings. Third, diversification in retirement-asset allocation increased the savings of lower earners but had no significant effect on higher earners' savings.3 And fourth, employer contributions increased lower earners' DC plan wealth but had no significant effect on higher earners' DC plan wealth.

This article consists of six sections, beginning with this introduction. The second section describes the importance of examining changes in retirement savings for workers of different earnings levels; the third and fourth sections respectively describe the data and the estimation strategies. The fifth section presents the results of decomposition and regression analyses and discusses the robustness checks; the final section examines policy implications and concludes.

Factors Affecting Retirement Savings Differ by Earnings

Previous studies have examined how earnings affect retirement wealth accumulation. Dushi, Iams, and Tamborini (2011) reported that earners at the lower end of the earnings distribution are much less likely to participate in DC pensions, and that those who do participate contribute a lower share of their earnings than higher earners do. Smith, Johnson, and Muller (2004) found that retirement-plan participation rises with increases in own earnings, family income, and age; and with being a homeowner, the birth of a child, and having a spouse with health problems. Conversely, changing jobs, having unemployment spells, and having greater numbers of children reduced participation. That study also found that retirement-plan participation responds to plan design features, such as whether loans are allowed and whether the employer matches contributions. Dushi, Iams, and Tamborini (2013) were the first to evaluate the effect of a significant earnings loss-defined as a drop of 10 percent or more-on retirement savings. They found that DC plan participants experiencing such a significant earnings loss during the Great Recession of 2007-2009 were more likely to have stopped contributing to their plan by 2009 than were those with stable earnings, and that overall, their contributions decreased substantially. Dushi and Iams (2015) similarly found that significant earnings losses and job changes depressed contributions during the Great Recession and in the preceding 2-year period. …

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