My new study with SCEPA researchers Joelle Saad-Lessler and Eloy Fisher, "The Automatic Stabilizing Effects of Social Security and 401(k) Plans," documents how the economic recovery is impeded by market-based retirement plans, such as 401(k)s, and shows how government-supported accounts such as pensions and Social Security stabilize and support economic recovery.
This study makes it clear that the private sector's historic transition towards market-based retirement plans and away from traditional pensions has not only harmed investors who lost their savings in the Great Recession, but injured the overall economy. In fact, 401(k)s not only de-stabilize the economy, they significantly undermine the benefits of other stabilizing programs, including the federal income tax, unemployment insurance, and Medicare and disability insurance.
As the first-ever comparative study of how large pension institutions impact the long-term business cycle, the study compares the effects of Social Security against market-based retirement vehicles such as 401(k) plans. The size of both of these systems - 93% of American workers are covered by Social Security, and 63% possess 401(k)-type retirement plans - gives them a significant influence on the economy.
The study finds that market-based retirement accounts increase the volatility of the business cycle, contributing to an overheating of the economy during expansive periods and exacerbating economic contraction during recessionary spells. On the other hand, Social Security helps to reign in the economy during periods of expansion, and stimulating it during recessions - a function known as an automatic stabilizer. The study finds that for every $1 increase in real GDP, 401(k) plans reduce government programs' automatic stabilizing impact by 15%.
Our study provides hard proof that 401(k)s are a lose-lose for both individuals and the economy. They expose individuals' retirement savings to market risk and hurt the economy's overall ability to create jobs and spur consumption. Economists of all stripes understand the importance of automatic stabilizers to the economy. Now is the time for policy makers to follow by addressing the unintended consequences of incentivizing market-based retirement accounts at the expense of programs that are a win-win for everyone, including traditional pensions and Social Security.