Do pension changes affect how much participants save?
Sticky participant behavior means some public workers face savings shortfalls.
An issue brief published in March by the Center for Retirement Research at Boston College wonders whether public workers with access to a pension plan modify other kinds of saving based on their projected pension income.
Although there is wide public support for pension plans in general, earlier research from CRR shows that some plans are so poorly funded, they may not be able to pay retirees the full benefits they are owed, CRR found.
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CRR assumed a simple hypothesis: If workers’ pension benefits are expected to decline by one dollar, they will increase their savings in another type of plan by the same amount. However, it probably won’t be a surprise to many advisors who work with participants that this doesn’t really happen. It may be hard for workers to judge the size of their pension benefits or how well the plan is funded. Some may not know whether they will be covered by Social Security, which a quarter of public workers are not, CRR found.
CRR used data from the Census Bureau’s Survey of Income and Program Participation for information on individuals, and the Public Plans Database for information on 200 state and local pension plans. The final sample represents over 10,000 public workers across every major occupational group.
CRR found only about 21% of public workers are saving in a defined contribution plan in addition to their pension plan. The analysis found that there is some change in behavior when pension benefits decline, but it’s pretty small. A one percentage point increase in the employer’s contribution results in a 0.19 point decline in participation. The same increase in employees’ contributions results in 0.46 point decline.
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For pension plans with very low funded status, workers are no more likely to save in a defined contribution plan than those in better funded pensions. Future Social Security benefits had no impact on public workers’ participation in a defined contribution plan, CRR found.
“One possible explanation for the small estimated effects in the full sample is that workers who are not yet vested in the plan do not react to its generosity,” the authors theorized. “Limiting the sample to only vested workers produces fairly similar results, although vested employees do appear more responsive to the employer contribution than non-vested employees.”
When researchers dropped local data to eliminate potential errors in merging the PPD and SIPP data, they found a similar impact. Participation fell 0.19 percentage points with a 1-point increase in employer contributions, and 0.40 percentage points with a 1-point increase in employee contributions.
Even when CRR expanded the sample to include public workers who had any additional household retirement savings outside of their pension plan, employee behavior changed by less than a percent. This wider sample included 30% of workers with outside retirement savings. A one percentage point increase in employer contributions reduced the likelihood of outside savings by 0.22 percentage points. The same increase in employee contributions resulted in a 0.68-point decline in the likelihood of outside savings.
“It seems that whatever dependent variable or sample is used, the basic result is the same: state and local workers respond to higher pension income as expected, but at a low magnitude, and do not respond at all to low plan funding or a lack of Social Security coverage,” CRR concluded.
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