At the Corner of Main and Wall Street: Family Pension Responses to Liquidity Change and Perceived Returns

Published: 2012


The U.S. economy experienced a shift away from employment with coverage under a defined benefit (DB) pension plan during 1991-2009. Defined contribution (DC) plan coverage seems not to have risen much, if at all, for married men in the recent decade. Overall, the percent of the labor force covered by any pension type fell over the period 2001-2009, with most of the shift occurring in 2001-2003, as indicated by data from the Panel Study of Income Dynamics (PSID). We seek to determine the factors that lead families to lose or gain DC coverage and to put money into their private pensions or to draw money out of private pensions and annuities prior to age 65. The importance of such discretionary participation and savings responses is accentuated by both the presence of DC pensions, and, presumably, learning that such pensions can be used to stabilize finances prior to retirement. Besides the impact of the overall economic climate, individual, family level events and cash flow changes are expected to play a role in the decision to add to or withdraw from a DC pension plan. Preliminary studies suggest that the savings response by households to recent economic uncertainties during 2009-2011, was greater overall savings and an increase in liquid asset holding, a result consistent with classic predictions of a response to economic turmoil. Overall, pension fund inflows have not been a part of the increase in private saving in the Great Recession.

Key Findings

    • Analyzing data from the Panel Study of Income Dynamics (PSID) during 1999-2009, we find that participation in and contributions to defined contribution pensions rose prior to the recessions of 2001-2002 and 2008-2009, and then declined during the recessions.
    • During both recessions, families were more likely to withdraw funds from their pension, annuity or IRA. Moreover, the number of families withdrawing 60 percent or more of their pensions saw the biggest increase.
    • Low wealth, low income and out-of-pocket medical expenses were predictors of reduced contributions and of overall pension withdrawals by families.
    • Mortgage distress measures also predicted pension fund withdrawals.
    • While tapping into pension funds can stabilize a family’s consumption during periods of financial distress, this may work to limit long-term wealth accumulation for retirement.