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 2008-2009

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Abstract

Our findings suggest that although the consequences of the decline in the stock market are serious for those approaching their retirement, the average person approaching retirement age is not likely to suffer a life changing financial loss from the stock market downturn of 2008-2009. Similarly, the likely effects of the stock market downturn on retirements have been greatly exaggerated. If there is any postponement of retirement due to stock market losses, on average it will be a matter of a few months rather than years. Counting layoffs, retirements may be accelerated rather than reduced. We provide background information that corrects misperceptions about pension holdings of the retirement age population. Pension coverage is much more extensive than is usually recognized. Over three quarters of the households with a person ages 51 to 56 in 2004 are currently covered by a pension, or have enjoyed pension coverage in the past. Pension wealth accounts for 23 percent of the total wealth of those on the cusp of retirement. For those nearing retirement age, defined contribution plans remain immature. As a result, almost two thirds of pension wealth held by those 51 to 56 in 2004 is in the form of a defined benefit plan. Lastly, women approaching retirement age are more likely to be covered by a pension than are women from earlier cohorts and they account for a significantly larger share of household pension wealth.

Key Findings

  • The average person in their mid fifties is not likely to suffer a life changing financial loss from the stock market downturn of 2008-2009.
  • Almost two-thirds of their pension wealth was held in defined-benefit plans (with only 15 percent¬†invested in stocks) and one-quarter of their pension wealth¬†consisted of future Social Security benefits.
  • If workers postpone retirement due to their stock market losses in 2008-2009, we estimate that 9 percent will delay retirement by 1-2 years, but the average person will delay it for a only few months.
  • However, increases in the number of job losses may force some people to retire sooner than planned, which may result in more earlier retirements overall.
  • More women approaching retirement are covered by a pension than in past years and they account for a significantly larger share of household wealth.

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Project

Paper ID

WP 2009-206

Publication Type

Working Paper

Publication Year

2009