The Transformation of the American Pension System: Was It Beneficial for Workers?

4 The Slowdown in Pension Wealth Growth in the 2000s

81 4 The Slowdown in Pension Wealth Growth in the 2000s As I discuss in Chapter 1, one of the most dramatic changes in the retirement income system over the last three decades has been the replacement of many traditional DB pension plans with DC pensions. Has this transformation been beneficial to most American households? This is the principal focus of the chapter. Poterba, Venti, and Wise (1998) find that the transition from DB to DC type plans increased mean pension wealth dramatically in the 1990s, at least. I find that the transformation was largely beneficial to American families during the 1980s and 1990s, particularly the latter decade, when the stock market boomed. However, during the period 2001–2007 (and before the meltdown in the financial markets), pension wealth growth slowed substantially . Moreover, overall pension coverage itself, after rising rapidly from 1989 to 2001, fell in 2007. A secondary interest is the effect of pension wealth on overall wealth inequality. Feldstein (1976), in a seminal paper on this subject, finds that adding Social Security wealth to marketable net worth led to a sharp reduction in measured wealth inequality (see Chapter 3). Is this also true for pension wealth? Does retirement wealth in total (the sum of Social Security and pension wealth) help to equalize the distribution of household wealth? This chapter will show that the addition of pension wealth to marketable net worth does reduce overall wealth inequality , but the equalizing effect is much smaller than that of Social Security wealth (discussed in Chapter 5). Moreover, the evidence of both this chapter and Chapter 5 will show that the equalizing effect of retirement wealth dissipated over time, particularly after 2001. The results of this and the next chapter will also clear up the “puzzle” discussed in Chapter 2—that (marketable) wealth inequality remained largely unchanged from 1989 to 2007, while both income inequality and the ratio of stock prices to housing prices increased. In contrast, I do find an increase in the inequality of augmented wealth (the sum of Wolff.indb 81 Wolff.indb 81 11/21/2011 9:17:38 AM 11/21/2011 9:17:38 AM 82 Wolff net worth, pension and Social Security wealth) from 1989 to 2007 (see Chapter 5). The next section of the chapter develops the accounting framework used in the analysis. How has the change in the pension system affected pension coverage for individual workers? In this regard, the section after that presents results on pension coverage for workers both overall and by demographic characteristic for the period 1989–2007. The chapter then moves on to discuss the change in the pension system and the effects it had on pension coverage and pension values on the household level, and to investigate changes in pension coverage, pension wealth, and private accumulations—i.e., the sum of net worth and (private) pension wealth—on the household level over the more extended time interval, 1983–2007. The final section contains a provisional summary of the results. A full treatment of the retirement system would not be complete without consideration of the Social Security system. Chapter 5 introduces Social Security wealth and presents results on its movement on the household level from 1983 to 2007. It presents summary measures on total (augmented) household wealth, the sum of net worth, pension wealth, and Social Security wealth. The chapter will show alternative pension wealth calculations and present an update of the pension wealth estimates to 2009 (July 1, 2009, to be exact) on the basis of changes in stock prices. ACCOUNTING FRAMEWORK The standard wealth concept is marketable wealth (or net worth), which was defined in Chapter 2. It should be noted that the standard definition of net worth includes the market value of DC pension plans. Defined contribution plans include a variety of financial instruments . There are two types: individually provided plans and employerprovided plans. Individually provided plans are IRAs and Keogh plans.1 Standard employer-provided DC plans are 401(k), 403(b), SRA(supplemental retirement account), and 457 plans. Firms also provide a variety of other plans, such as profit-sharing, tax-deferred annuities, portable cash option plans, IRA-SEP (simplified employee pension) or IRAWolff .indb 82 Wolff.indb 82 11/21/2011 9:17:39 AM 11/21/2011 9:17:39 AM The Slowdown in Pension Wealth Growth in the 2000s 83 SIMPLE (simplified incentive match plan for employers), SARSEP (salary...