Abstract
People’s exposure to both labor and financial market risks has increased since the 1980s, while labor and financial markets have also become more unstable. The combination of growing risk exposure and rising risks has contributed to increasing wealth inequality, as households with high risk exposure have experienced lower wealth gains over time than households without high risk exposure. In this chapter, I focus on some of the mechanics of rising financial risk exposure with individualized savings, such as retirement savings accounts and housing.
How would you personally define what a secure retirement means to you?1
“I would say not a 401K because they are too unstable. I would say just a pension from a work group from a union or a union retirement that is the security that is given to us. It is what makes me feel secure in my life to guarantee that I have a retirement to fall back on.” (White man, 54 years old)
“I think it’s helpful and I like a 401(k) plan to have secured income in retirement.” (African American woman, 25 years old)
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Notes
For a review of the relevant literature, see Stefano DellaVigna, “Psychology and Economics: Evidence from the Field,” Journal of Economic Literature 47, no. 2 (June 2009), 315–372;
Shlomo Benartzi and Richard H. Thaler, “Heuristics and Biases in Retirement Savings Behavior,” Journal of Economic Perspectives 21, no. 3 (2007), 81–104.
See, for instance, Christian Weller, “Did Retirees Save Enough to Compensate for the Increase in Individual Risk Exposure?” Journal of Aging and Social Policy 22, no. 2 (2010), 152–171.
See also Jacob S. Hacker, The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream (New York, NY: Oxford University Press, 2008).
Pension funding depends on the employers’ assumptions of future interest rates they can earn on their DB pension plans. These interest rates are regulated by PPA. Interest rates tend to fall and thus pension contributions tend to rise during recessions, when companies can least afford the added costs. For a discussion of the link between macroeconomic cycles and interest rates, see Christian Weller and Dean Baker, “Smoothing the Waves of Pension Funding: Could Changes in Funding Rules Help Avoid Cyclical Under-funding?” The Journal of Policy Reform 8, no. 2 (June 2005), 131–151.
See, for example, Robert M. Dunsky and James R. Follain, “Tax-Induced Portfolio Reshuffling: The Case of the Mortgage Interest Deduction,” Real Estate Economics 28, no. 4 (2000), 683–718;
Victor Stango, “The Tax Reform Act of 1986 and the Composition of Consumer Debt,” National Tax Journal 52, no. 4 (December 1999), 717–739.
John Y. Campbell and Robert J. Shiller, “Valuation Ratios and the Long-Run Stock Market Outlook,” The Journal of Portfolio Management 24, no. 2 (Winter 1998), 11–26;
John Y. Campbell and Louis M. Viceira, “Long-Horizon Mean-Variance Analysis: A User Guide” (manuscript, Cambridge, MA: Harvard University, 2004).
Robert J. Shiller, “Historic Turning Points in Real Estate,” Eastern Economic Journal 34, no 1 (Winter 2008), 1–13. Housing market swings tend to be a little shorter, typically taking about a decade to go through a boom and bust cycle.
Regina T. Jefferson, “Rethinking the Risk of Defined Contribution Plans,” Florida Tax Review 4, no. 9 (2000), 607–683;
Marie-Eve Lachance, Olivia S. Mitchell, and Kent Smetters, “Guaranteeing Defined Contribution Pensions: The Option to Buy Back a Defined Benefit Promise,” Journal of Risk and Insurance 40, no. 1 (2003), 1–16, doi: 10.1111/1539–6975.00044.
Shlomo Benartzi, Alessandro Previtero, and Richard H. Thaler, “Annuitization Puzzles,” The Journal of Economic Perspectives 25, no. 4 (Fall 2011), 149–164;
US Government Accountability Office (GAO), “Retirement Income, Ensuring Income throughout Retirement Requires Difficult Choices,” GAO-11–400 (Washington, DC: GAO, June 2011), 7.
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© 2016 Christian E. Weller
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Weller, C.E. (2016). Sink-or-Swim Retirement Plans. In: Retirement on the Rocks. Palgrave Macmillan, New York. https://doi.org/10.1057/9781137575142_6
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DOI: https://doi.org/10.1057/9781137575142_6
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