How 401(k) Plans Make Recessions Worse
Authors: Teresa Ghilarducci and Joelle Saad-Lessler
Date: June 2014
This study concludes that 401(k)-type retirement plans exacerbate recessions, whereas annuity-backed retirement accounts such as defined benefit plans and Social Security stabilize the economy during both recessions and expansions - a function known as automatic stabilizers. These plans work as automatic stabilizers because their benefits do not fluctuate with market returns allowing consumption to remain constant through recessionary and expansionary times. Alternatively, 401(k)-type plans are private market-based retirement accounts, therefore their success or failure is tied directly to the booms and busts of the business cycle. The value of these accounts increases during economic expansions and decreases during recessions, which directly and immediately impacts consumption causing consumers to reduce spending in recessions, therefore worsening the recessions.