Negative Interest

Research on retirement

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Teresa Ghilarducci and Joelle Saad-Lessler: How 401(k) Plans Make Recessions Worse (Schwartz Center for Economic Policy Analysis at the New School):

This study looks past the decline in housing values, the success of traditional automatic stabilizers and stimulus spending as explanations of the dynamics of the recession. Annuity based retirement accounts backed by government programs also helped the economy, while financially-based retirement programs like 401(k) type programs, hurt the economy.

The Great Recession reduced the value of some retirement assets and not others. Over half of households own IRAs, 401(k), and 401(k) type accounts and the values of these accounts fell an average of by 14% in 2008, with wealthy households losing the most (Vanderhei 2009). Middle class and lower income households, whose current and future retirement income wealth derives primarily from Social Security, disability insurance, defined benefit pension plans and Medicare lost almost nothing in the 2008- 2009 recession (Smeeding and Thompson, 2013, Gustman, Steinmeir, Tabatabai 2011).

According to Gustman, Steinmeir, Tabatabai (2011) “those in the middle class in terms the wealth distribution experienced a 4.3 percent drop in wealth; there was essentially no drop in total wealth for households in the lowest wealth quartile because Social Security wealth (which was unaffected by the recession) makes up a much larger share of total wealth for poorer households.” Federal Reserve economists Peterman and Sommer (2014) found that Social Security reduced the exposure of households to the wealth shock of the Great Recession.

The micro economy of worker and retiree households experienced the Great Recession very differently depending on how much of their retirement income and expected retirement income came from a promised stream of income from Social Security and traditional pensions and how much of their retirement wealth relied on financial-market based assets.

The macro economy also benefited from government-based retirement assets and suffered, like households suffered, from having retirement income depend on financial assets: 401(k) plans whose value depended on flows, dividends and capital gains from stocks, bonds, and other financial assets. In short, the existence of 401(k) plans and other financial market based retirement wealth – whose values fluctuate with the business cycle — made the last recession deeper and caused more unemployment than would have happened otherwise if 401(k)s did not exist.

Michael Lind, Steven Hill, Robert Hiltonsmith, Joshua Freedman: Expanded Social Security: A Plan to Increase Retirement Security for All Americans (New America Foundation):

As private employers have shifted away from providing defined benefit pensions, they have turned to defined contribution plans like 401(k)s instead. Unlike traditional defined benefit pensions, defined-contribution plans allow employees to set aside fixed amounts of money into investment accounts. That amount is excluded from their gross wage when calculating taxable income, lowering their tax burden. One advantage of this method is that the 401(k)s and IRAs are somewhat portable from job to job. But workers’ eventual retirement income from these accounts depends entirely on how much money they set aside during their working lives and how well the stock market and investments in their accounts performed. Employers have greatly preferred new america foundation page 6 401(k)s over defined-benefit pensions because workers shoulder the primary responsibility for funding them rather than the employer.

The growth of the 401(k) stems from legislation in the late 1970s. In the Revenue Act of 1978, Congress inserted a new section into the tax code, section 401(k), that allowed workers to take part of their pay as tax-free deferred compensation. Section 401(k) was not the first tax provision that allowed Americans to save for retirement in tax-deferred accounts: Individual Retirement Accounts had been created as part of the 1974 Employee Retirement Income Security Act (ERISA) and 403(b) accounts (taxdeferred accounts for employees of non-profits) have been around since the 1930s. But section 401(k) was the first provision that allowed workplace-sponsored tax-deferred retirement accounts for all types of employees, and thus opened the door for the proliferation of such accounts that has occurred in the decades since.

Since 1979, defined contribution and 401(k) retirement plans have gone from covering only about 17 percent of the private workforce to about 42 percent today (see Figure 2, above).14 In some businesses, the employer contributes to the 401(k) plans that are managed by the employees, but the contribution amount is much less than under a defined payout pension.

These individual retirement plans – most prominently, 401(k)s – have been sold to American workers as the new and improved successors to traditional pensions. 401(k)s, however, have proven to be more costly for both the government and employees than the system they replaced. They force workers as individuals to face a number of significant risks, including losing their savings to a stock market downturn, through investing their money unwisely, or outliving their savings. US workers were insured more efficiently and more securely under the traditional pension system.


Written by negativeinterest

April 13, 2015 at 7:46 pm

Posted in Uncategorized

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