“How Do Pension Changes Affect Retirement
Preparedness? The Trend to Defined Contribution
Plans and the Vulnerability of the Retirement Age
Population to the Stock Market Decline of 20082009”
Alan L. Gustman, Thomas L. Steinmeier and Nahid
Tabatabai
Part 1 of this presentation provides background information drawn from our
forthcoming book, Pensions in the Health and Retirement Study, Harvard
University Press, which has benefitted from support by NIA grants
IPOIAG022481, R01 AG024337, “R01 AG022956 and from the HRS. Part 2
has been supported by the Social Security Administration through MRRC
under grant number UM09-09.
1
Press and Public Concerns with Adverse
Effects of Stock Market Decline
• Special concern for those approaching retirement
age
– little time to adjust.
• Trend to DC and decline of DB plans increases
vulnerability to stock market decline.
• Widespread discussion -- fall in stock prices will
force people to delay their retirements.
• Some suggestion new labor market and pension
policies should be aimed at older workers.
2
Two Parts
I. Background discussion of relevant pension outcomes and
trends in the Health and Retirement Study.
– (drawn from our forthcoming book, Pensions in the Health and
Retirement Study)
2. A paper entitled “The Retirement Age Population and the
Stock Market Decline”
– discusses the effects of the stock market decline on the financial
assets and retirement behavior of the early boomer cohort of the HRS,
in light of the trends discussed in part 1.
3
HRS Cohorts
 Pension outcomes and trends based on three
cohorts ages 51 to 56 in:
 1992 (HRS)
 1998 (War Babies)
 2004 (Early Boomers)
 Effects of stock market decline on wealth:
 uses observations from Early Boomer cohort in 2006
Bottom Line: Effects of Stock Market
Decline
• Overall those nearing retirement are not very
vulnerable to stock market decline.
– When a comprehensive measure of total wealth is
used, only 13.2 percent of total assets held by
Early Boomers are in stocks.
– With even a 50% decline in stock prices, 6.6%
average loss in wealth is not life changing.
– Distributional effects are same order of
magnitude.
5
Factors Cushioning Retirement Age Population
from the Stock Market Decline
 Social Security accounts for over a third of total wealth.
(Thanks to Kandice Kapinos and HRS for SS data.)
 Large growth in Social Security due to:
 Spouse earnings growth.
 Real earnings growth.
 Growth in cap on covered earnings during first decade of work has raised covered
earnings for younger cohorts and forced saving.
 Early in their careers, the older HRS cohorts faced a maximum taxable
earning of $4,000 or $5,000, while members of later cohorts had much
higher maximums.
 Continued importance of DB wealth and immaturity of DC
plans for retirement age population.
 Almost 40% of households do not own any stocks.
 Portfolio Diversification: Neither DC plans nor IRAs are fully
invested in stocks.
 Growing importance of pensions and earnings of women.
6
Table 1: Percent of Respondents Ages 51 to 56 with
Any/Dormant/Live Pension from Current/Last or Previous Jobs
by Cohort: Weighted
HRS 1992
War Baby
1998
Early
Boomer
2004
Current job pension
43.0
46.2
46.8
Dormant pension
10.3
13.6
15.9
Pension in pay status
5.0
5.0
3.5
Live pension
52.7
56.9
56.6
Ever held a pension
62.4
68.7
68.0
Pension Status
Source: Gustman, Steinmeier and Tabatabai (forthcoming).
7
Table 2: Percent of Households and Respondents With Any
Own/Spouse/Partner Pension from Current/Last or Previous Jobs
by Cohorts: Ages 51-56 in 1992, 1998, and 2004- Weighted
Household
Members
HRS
War
Babies
Early
Boomers
All Respondents
78.8
81.2
80.4
All Households
76.9
79.3
78.6
Source: Gustman, Steinmeier and Tabatabai (forthcoming). Respondent reported as covered if the respondent was covered in
his or her own right or if respondent’s spouse is or was covered.
8
Table 3: Pension Plan Type Among Full Time Employees Ages
51 to 56 with a Pension: Weighted
Pension
Characteristics
1992 HRS
1998
2004 Early
Warbabies Boomers
% with at Least One
DB Plan
69
61
51
% with at Least One
DC Plan
58
70
72
Source: Gustman, Steinmeier and Tabatabai (forthcoming).
9
Table 4: Average Number of Years of Job Tenure and Pension
Tenure by Plan Type and Cohort Ages 51 to 56 in 1992, 1998 and
2004: weighted
DB Plans
Cohorts
Job Tenure
HRS
War Babies
Early
Boomers
DC Plans
Pension
Tenure
Job Tenure
Pension
Tenure
17.6
16.4
15.6
8.1
(1540)
(1540)
(1197)
(1197)
18.5
17.4
14.2
8.4
(622)
(622)
(629)
(629)
16.8
16.3
13.8
9.7
(755)
(755)
(990)
(990)
Source: Gustman, Steinmeier and Tabatabai (forthcoming), Table 6.4.
10
Table 5: Observed Plus Imputed Pension Values From Current, Past and
Previous Jobs Per Household, by Source of Pension by Plan Type, 1992, 1998,
and 2004 (in 1992 Dollars)- Respondent Data: Weighted
Cohorts
Total HH
Pension
HRS: 51-56
149,753
% of Total
Total
Total
HH
Pension Due Pension
Pension
to DBs
Due to DCs Due to
DCs
112,480
37,274
25%
103,230
55,202
35%
101,082
62,769
38%
(3003)
WBs: 51-56
158,432
(1758)
EBs: 51-56
163,642
(1709)
Source: Gustman, Steinmeier and Tabatabai (forthcoming), Table 9.19.
11
Table 6: Observed Plus Imputed Pension Values From Current, Past and
Previous Jobs Per Household, by Source of Pension by Gender, 1992, 1998,
and 2004 (in 1992 Dollars)- Respondent Data: Weighted
% of Total
Total
Total
HH
Pension
Pension
Pension
Wealth Due Wealth Due Wealth
to Men
to Women
Due to
Women
112,480
37,274
25%
Cohorts
Total HH
Pension
Wealth
HRS: 51-56
149,753
WBs: 51-56
(3003)
158,432
114,997
43,435
27%
EBs: 51-56
(1758)
163,642
111,236
52,406
32%
(1709)
Source: Gustman, Steinmeier and Tabatabai (forthcoming), Table 9.16.
12
“The Retirement Age Population and the Stock
Market Decline”
Alan L. Gustman, Thomas L. Steinmeier and Nahid
Tabatabai
We are grateful for support provided by the Social Security Administration
through the Michigan Retirement Research Center under grant number
UM09-09.
13
Share of Total Wealth in the Stock Market
Table 1: Components of Wealth in 2006 For Early Boomer
Households : Current Dollars*
Mean
Source of Wealth
Total
Social Security Plus
Pensions
Social Security
Pension Value
DB Value
DC Value
Current DC Balances
Current DC in Stocks
House Value
IRA Plus Direct Stock
Holdings Plus DC in Stocks
Observations
Mean For The Median 10
Percent Of Wealth
Holding Households
Value
Percent of
($)
Total
(%)
Value
($)
Percent of
Total
(%)
870,991
100
659,516
100
482,257
55.4
439,738
66.7
304,802
177,456
115,638
61,818
44,471
27,449
168,798
35.0
20.4
13.3
7.1
5.1
3.2
19.4
328,301
110,012
79,865
30,147
22,871
13,154
118,856
49.8
16.7
12.1
4.6
3.5
2.0
18.0
115,382
13.2
51,780
7.9
2,492
* Households with the top and bottom 1% of total wealth excluded. Missing asset values imputed. Obs. are
weighted. Social Security wealth from Kapinos et al.
15
Table 3: Distribution of Assets by Wealth Decile in 2006 For
Households with at Least One Member Born from 1948 to 1953
Average Asset Value for Respondents in Indicated Total
Wealth Deciles
Sources of Wealth
Total
110
1120
2130
3140
4150
5160
6170
7180
8190
91100
Total Wealth ($000)
70.4 187 312 442 583 741 918 1,166 1,566 2,714 871.0
Total Wealth in Stocks/Total
Wealth (%)
1.1
2.5
3.5
4.9
6.9
8.5
9.9 10.4 15.1
20.7
13.2
1. Households with top and bottom 1% of total wealth are excluded.
2. Values as of 2006 are reported in thousands of dollars.
16
Effect of Stock Market Decline on
Retirement
• Goal: Isolate effect of stock market decline
from other factors affecting retirement.
• Strategy, simulate effect of dot com decline,
only slightly smaller than current decline.
• From peak in August 2000 to end of Sept.
2002, cumulative decline of 34 percent.
• Recession of 2008-2009. Dow peaked at
14,164 in October, 2007. Decline to date
roughly similar.
3
Figure 7
Effects of 2000-2002 Stock Market Bust on Retirement
0
-0.5
Percent
-1
-1.5
-2
-2.5
-3
-3.5
2001
2002
2003
2004
Year
2005
2006
19
Retirement Changes Are Likely to be
Small.
• Retirement reductions due to stock market
wealth losses alone are likely to be small.
• Layoffs will increase retirements.
20
Housing Wealth
Policy Issues
 Labor market policies will be very difficult to target
efficiently.
 Difficult to distinguish market failure from voluntary retirements.
 Retirement age workers look like troubled workers.




Many are jobless
Exhibit earnings declines
Transitions from full time to part time work
Same characteristics usually used to distinguish those eligible for
unemployment insurance, job training and transfers.
 Result: high probability of free riders.
23
Policy Issues
Investments in older workers will often have
lower returns.
 Remaining work life of older persons is relatively short.
 Attempts to encourage greater part time work by
relaxing minimum hours constraints and pension
rules will reduce work by those who otherwise
would continue to work full time. Result is a wash.
(Gustman and Steinmeier, 2008)
24
Summary – The Good News
• Despite wide pension coverage and trend to DC
plans, those on the verge of retirement not very
vulnerable to stock market decline.
–
–
–
–
–
DC plans still immature.
DB plans remain dominant.
Heavy dependence on Social Security.
Many have no stock exposure at all.
As a result, only 13% of assets in stocks.
• Few will delay retiring due to fall in stocks.
• Nor will fall in house prices have immediate effect.
25
Caveats: Remaining Concerns Best
Answered with Data From 2010 HRS
• Ultimate effects of layoffs
– Potentially severe consequences for older job losers
– Job loss may increase, not decrease retirements.
• Difficult for some to locate another job.
• Retire rather than accept a lower wage.
• Ultimate decline in DB values – limited by PBGC
insurance and proximity to retirement.
• Who are the largest losers?
– Incidence and effects of multiple adverse events.
(Rohwedder, internet data)