Consequences of 401(k) s 3. Pension Reform

Transcription

1 Policies to Strengthen the Employment Based Pension System for All 1. Pension Erosion 2. Unintended Consequences of 401(k) s 3. Pension Reform 1

2 The Pension Problem Accumulatio Investments n Payout a Ghilarducci 2

3 3 1. Pension Erosion

4 Pension Funds Grow and Financialize Shares of Financial Assets by Sector Pension Funds 20% 26% Pension reserves (of life insurance companies) 5% 5% Private Pensions (includes federal pensions) 12% 15% State, local pension funds 5% 6% Mutual funds (401(k) and IRAs) 2% 22% Commercial banks 37% 31% Savings institutions 2% 5% Insurance (net of pension reserves) 1% 8% Finance companies 5% 4% Real estate investment 0.1% 0.6% Security brokers 1.% 5% 4 Total Assets (in trillions $)

5 Financialization of Pensions Private 47.5% 42.6% Pension Coverage DB 88% 36% 5 DC 12% 64%

6 Despite Growth in 401(k)s Pension Coverage Has Worsened (SIPP, author s calculations) Top One Third Middle One Third Lower One Third

7 Tax Expenditures Are Inefficient, Ineffective, and Unfair. Otherwise they are Ok 7

8 Tax Expenditures 6% of taxpayers with incomes over $100,000 per year get 50% of the tax subsidies. 401(k) tax breaks will grow 49% but they exceed the amount of aggregate savings If we limit tax breaks to contributions under $5,000 then all can have $400 per year 8

9 Pension Tax Expenditures Do Not Stimulate Private Savings or Wealth Creation U.S. Tax Expenditures for Employer Plans EXCEED Savings, in Billion Dollars TAX EXPENDITURES SAVINGS

10 Attanasioban ks, Wakefield 2004 CES IRAs in the US and TESSAs and ISAs in the UK represent little additions to saving, expensive methods to encourage HH saving. Bernheim 1999 N/A Review of literature recognizes difficulty Engelhardt 2000 HRS Previous studies overstate estimates on effectiveness of 401(k) saving effects due to measurement error (self-reported eligibility). 401(k) have not had a positive effect on raising the saving rate. Engen Gale 1997 SIPP There's a substitution effect in play, HH sometimes borrow, increase debt (shift to mortgages), decrease consumption to make contributions to these plans, so net saving has not increased Engen, Gale 2000 SIPP Effects of 401(k) are dependent on the level of earnings; low income earners see a net addition to wealth from 401(k) than high income earners. Engen, Gale, Scholz Engen, Gale, Scholz 1994 SIPP/IRS- Michigan Tax Panel 401(k) have not stimulated private saving or wealth. IRAs, 401(k) and Keoghs are to some extent substitutes in HHs portfolios. Nevertheless, a small portion of IRA contributions have increased private saving (very little/positive effect after taking into acct the decline in tax revenues) 1996 SIPP/SCF Saving incentives have a strong effect on the allocation of saving and wealth but not on the level. Gale, Scholz 1994 SCF reshuffle assets from other sources to IRA accounts Poterba, Venti, Wise Poterba, Venti, Wise 1994 SIPP After comparing the net worth of eligible HH with ineligible HH, 401(k) saving has a negligible effect in displacing other private saving 1995/96 /98 SIPP The growth of non-401(k) assets for contributors and non contributors have little effect on other forms of private saving; After testing data controlling for different factors (heterogeneity, home equity) 401(k) and IRA contributions are net additions to saving 10

11 2. Unintended Effects of 401(k)s: Automatic Destabilizers 11

12 Unintended Effects of 401(k)s In Recessions Economic Effect DC plans Traditional DB 1. Direct consumption effect (on retirees) Decreases 2. Wealth effect on Decreases No effect consumption (on workers, 401(k) owners) 3. Labor supply effects (on workers and retirees) Increases Lowers because contributions increase and increases because of income Decreases Net Effect Destabilizing Stabilizing 12

13 13 UI doing its thing

14 Social Security OASI 14

15 15 401(k) consumption increases in expansions!

16 Traditional and Non Traditional Automatic Mean De/Stabilizers Share of GDP Federal Income Tax Collections UI Outflow UI Inflow OASI Outflow OASI Inflow K Outflow K Inflow DI Outflow DI Inflow Medicare Outflow Medicare Inflow

17 ) Δ Y x Y α + δiz ε it + it real it t No al = β i + iδ min Potential t Y t ( real Potential ) Δ x = α + β Δ Y Y + δ Z + ε it i i t t i it it 17

18 Only 401(k) Plans Have Destabilizing Effects Program Flows* 1 Estimated impact of a change in the output potential gap on changes in the levels of program outflows/inflows OASI Outflows ** 401(k) Outflows ** DI Outflows ** UI Outflows ** 18 Federal Income Tax Collections **

19 3. Policy Recommendations for Private and Public Pensions 19

20 People want a retirement solution 83% say government should guarantee pensions. 81% say government should guarantee healthcare. 78% say government should raise minimum wage. 20

21 The Pension Problem Accumulatio Investments n Payout a Ghilarducci 21

22 Characteristics of a Good Pension System Universal Coverage Portable Between Jobs Pooled Assets Adequate Pensions Targeted Government Aid 22 Annuities not Lump Sums Payout at retirement, no early withdrawals

23 Characteristics ti Of Good Pension 401(K) Obama GRA System Auto-IRA GRAs Universal coverage No Almost Yes Portable No Yes Yes Pooled assets, efficiently administered No No Yes Adequate Pensions No No Yes Targeted Government Aid No Yes Yes Annuities No No Yes Payout at retirement, no withdrawals No No Yes [i] 23 23

24 CONTRIBUTIONS 5% of pay is split evenly between the employer and employee. Everyone gets a 24 $600 tax credit which is adjusted for

25 INVESTMENTS Professional Board invests the money in private markets managed by a Guaranteed Retirement Fund. 25 The guarantee will be

26 PAYOUT AT RETIREMENT GRA s will provide a yearly payout to the individual id adjusted for inflation. The accumulated funds cannot be 26 withdrawn before retirement.

27 Everybody wins! 27 Workers with Pensions and 401(k) s Wall Street Firms Private Employers with Pensions and 401(k) s. Public Employers with Pensions in Crises. Workers without Pensions.

28 Policies to Strengthen the Employment Based Pension System for All Teresa Ghilarducci Irene and Bernard Schwartz Professor of Economics New School for Social Research Beyond the 401(k) Project funded by the Rockefeller Foundation (with assistance from, Daniela Arias, Eloy Fisher, Bridget Fisher, Robbie Hiltonsmith, Lauren Schmitz and Joelle Lessler) 28