How 401(k) Plans Make Recessions Worse

Transcription

1 Teresa Ghilarducci Bernard and Irene Schwartz Professor of Economics The New School for Social Research How 401(k) Plans Make Recessions Worse 2016 Public Pension Funding Forum Yale University August New Haven, Connecticut

2 Research Questions How do 401(k)s impact the macroeconomy? How does that translate into lost jobs? 2

3 AP3 AP4 Previous Literature on Automatic Stabilizers Focuses Too Much On Traditional AS Darby, J. and Melitz, J. (2008) Ghilarducci, Saad-Lessler, and Fisher (2012) Findings: 401(k) plans are destabilizing while Social Security and DB plans act as automatic stabilizers 3

4 Slide 3 AP3 Alexander Pavlakis, 7/27/2016 AP4 Alexander Pavlakis, 7/27/2016

5 When a recession worsens and the output gap increases by $1 these programs take from the economy: Social Security, Unemployment Insurance, Disability Insurance, Medicare, Taxes Before Recession After Recession 45 cents 61 cents 401(k) Plans +5 cents +3 cents 4

6 Question: What is the Impact of 401(k) Plans on Jobs? Okun s Law: a 1% increase in the output gap lowers the unemployment rate by 0.45 percentage points. The observed output gap includes the effects of all programs. We translate the impacts of different programs into consumption changes. - Marginal Propensity to Consume (MPC) ranges from 0.09 to 0.9. Recalculate the change in the unemployment rate for adjusted change in the output gap using Okun s law 5

7 AP2 Average Shares of Traditional and Nontraditional Stabilizers: and Retirement Programs That Vary Over the Business Cycle Social Security taxes share of GDP 3.9 % 401(k) contributions share of GDP 1.3% SSDI inflow share of GDP 0.6% Medicare inflow share of GDP 1.2% Traditional Automatic Stabilizers Unemployment insurance inflow share 0.3% Federal income tax collection share 7.8% 6

8 Slide 6 AP2 Alexander Pavlakis, 7/27/2016

9 Net Impact of a Change in the Output Gap for Each Program Before the recession After the recession Program In shares In Levels In shares In levels OASI (k) UI SSDI Medicare Federal income tax collections OASI, UI, SSDI, Medicare, taxes 401(k)

10 Year Baseline Change in U Change in U without SS, DI, UI, Medicare, Taxes, 401(k) Change in U without SS, DI, UI, Medicare, Taxes, But with 401(k) MPC = MPC =

11 Year Number of Unemployed Change in # Unemployed without SS, DI, UI, Medicare, Taxes, 401(k) Change in # Unemployed without DD, DI, UI, Medicare Taxes, But with 401(k)s Effect of 401(k) Plans on # Unemploye d MPC = 0.09 MPC = ,925, , , , ,265,000 2,388,914 2,470,370 2,506, ,925, ,652 1,013,418 1,048, ,265,000 2,388,914 3,356,420 3,476,155 9

12 Conclusions 401(k)s led to more job losses during the Great Recession. Making retirement plans depend on financial markets by expanding 401(k) plans could worsen recessions in the future. 10

13 Michael Kahn, Ph.D. Director of Research National Conference on Public Employee Retirement Systems

14 There is little research on adverse societal consequences of shifting to DC plans and dismantling of public pension. NCPERS is leading the research on this subject, and I want to share some results with you.

15 Last year we looked at how these so-called pension reforms exacerbate income inequality and drag down our economy. Dozens of newspapers covered our study.

16

17 This year we look at the relationship between the socalled pension reforms and economic volatility Economic volatility refers to swings in the financial and economic system. It s an undesirable state of economy that disrupts the lives of many people.

18

19 1. When we undermine pensions, we undermine financial and economic stability provided by pension funds during economic and financial downturns due to their long-term investment horizon. 2. When we dismantle pensions, we undermine the economic cushion that pension checks provide to local economies during economic downturns. 3. When we convert DB into DC plans, we increase the probability of irrational rise in asset prices/bubbles by forcing people with little or no investment knowledge or experience to make investment decisions that were made for them by pension boards and professionals. 4. When we shift people to DC plans, we expose them to the economics of manipulation and deception. In a free market, there is not only freedom to choose, but also freedom to be fooled and caught-up into buying things and financial products we may not need or understand. 5. When we undermine pensions, we exacerbate income inequality. Which in turn not only drags the economy down, but also makes it volatile.

20 What are the prevailing approaches to the socalled pension reforms? Do these reforms exacerbate economic volatility? What can we do?

21 At the national level, the main trend has been conversion of defined benefit plans into defined contribution plans.

22 For each 1% shift to DC plans, economic volatility increases by approximately 2%

23 For each 1% shift to DC plans, financial volatility rises by 8%

24 For each 1% shift to DC plans, revenue volatility increased by 54%

25 34 states increased employee contributions 38 states instituted higher age and service requirements for retirement 30 states reduced COLAs 18 states instituted steps to convert DB plans into DC or Hybrid Plans (Mandatory Hybrid 6 States, Mandatory Cash Balance 3 State, Mandatory DC 2 States, and Choice of Plan 7 States)

26 Impact of Negative Pension Changes on Economic Volatility in the States, Variable Regression Coefficient Intercept Negative Pension Changes Income Inequality Regressivity of Tax System Public Employees 1.111

27 Impact of Negative Pension Changes on Revenue Volatility in the States, Variable Regression Coefficient Intercept Negative Pension Changes Regressivity of Tax System Public Employees 3.376

28 Analysis of empirical data shows that the prevailing so-called pension reforms increase economic volatility. When economic volatility rises, everyone suffers, not just public employees or those who have defined benefit pensions.

29 For starters, policymakers should pay serious attention to the hidden economic cost to taxpayers before they dismantle public pensions. Instead of dismantling pensions, state and local governments should close tax loopholes and corporate subsidies first. Compare: taxpayer money given to global corporations through loopholes and subsidies often ends up in overseas tax havens, while pension checks are spent in local economies.

30 Close Tax Loopholes VIDEO

31 Comparison of Annual Employer Pension Contributions and Annual Cost of Corporate Tax Loopholes and Subsidies in Selected States Source: Good Jobs First, 2014

32 1. We should remember that pensions are the great stabilizer of our economy. 2. Instead of dismantling them, we must preserve and expand them. 3. Everyone deserves a great pension!

33 Thank you You can reach me by or visit our website,