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

Abstract

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.

Wealth Disparities Before and After the Great Recession

“…And the least-advantaged families were less likely to have benefited from the post-2009 recovery in stock prices because they had already withdrawn a substantial share of their market holdings (Bridges and Stafford 2012) and because they had relatively small savings prior to the Great Recession.…”

“…This latter effect on wealth holdings may have been exacerbated by the fact that asset prices had declined significantly prior to the rapid increase in unemployment in 2008 and 2009. And the least-advantaged families were less likely to have benefited from the post-2009 recovery in stock prices because they had already withdrawn a substantial share of their market holdings (Bridges and Stafford 2012) and because they had relatively small savings prior to the Great Recession.…”

Stock Market Participation: Family Responses to Housing Consumption Commitments

“…In contrast, during the strong stock market periods up to 2001 and up to 2007, defined contribution pension participation—most of which involve a mix of stocks and other assets or mostly stocks—increased notably, while pension withdrawals were prevalent during 2001–3 and 2007–9 (Bridges and Stafford ) . As a source of protection against consumption commitment losses, pension fund withdrawals appear to have had a strong role .…”

“…This pension recovery period was quickly followed by a renewed rise in withdrawal rates and a fall in pension participation rates in 2008–9. During the recession of 2008–9, mortgage payment difficulties and out‐of‐pocket medical expenses were significant predictors of cashing in DC pensions (Bridges and Stafford ) . In this way families became indirect sellers of stock market holdings.…”

“…Notably, balanced panels of 25‐ to 63‐year‐old married men from the PSID show a rise in defined contribution plan participation (commonly composed of some or mostly stocks) from 15.5% to 18.1%, 2003–7. Moreover, among participants, dollars flowing in and out changed procyclically over the recent business cycles (Bridges and Stafford )…”