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Volume 13 Issue 2 - February 2013

Trouble Ahead: Fewer Have Retirement Funds, More Raid Them

ANN ARBOR -- The proportion of working Americans with pensions of any kind has steadily decreased since 2001, according to a University of Michigan analysis that suggests trouble ahead for U.S. seniors. "We expected to see a decline in the percent of employed workers with defined benefit pensions," said University of Michigan economist Frank Stafford. "Everyone knows they’re a thing of the past. But we also found that participation in defined contribution plans declined, going from 33 percent of employed men in 1999-2001 to 30 percent in 2007-2009. And that is the opposite of what we expected."

Stafford is the coauthor with Thomas Bridges, a U-M graduate student in economics, of a working paper titled "At the Corner of Main and Wall Street: Family Pension Responses to Liquidity Change and Perceived Returns." In the paper, they analyze data from the Panel Study of Income Dynamics, a survey of a nationally representative sample of U.S. households conducted by the U-M Institute for Social Research (ISR) since 1968.

During the period studied, researchers interviewed the same families every two years, obtaining a continuous look at how changes in the U.S. economy, notably the economic declines after 9/11 and the Great Recession of 2008, affected how families handled their IRAs, annuities, 401(k)s and other financial sources of defined contribution pensions.

They found that many families treat these retirement accounts as sources of ready cash for current needs and discretionary spending rather than as sources of income in retirement. About 6 percent of young adults ages 25 to 44 reported cashing in some of their pension money. And at age 59 ½ -- when early withdrawal penalties are removed -- about 15 percent withdrew from their accounts, which is about equal to the withdrawal rate of those ages 65 and 66.

Withdrawals jumped in 2003, after the 9/11 stock market crash, briefly stabilized, and then jumped again from 2007 to 2009.  "If you leave people to their own devices, it’s tempting for them to use this money before they retire," says Stafford. "Our data show that they’re withdrawing money for reasons ranging from out-of-pocket medical expenses to home repairs of more than $10,000 like a new roof, to discretionary expenses like remodeling their kitchens and installing granite countertops."

By far the most common reason for withdrawals appears to be mortgage loan distress, according to Stafford. Those who are behind on their mortgages, or are afraid they are going to fall behind, are raiding their retirement accounts to stay above water.

"That’s the problem with defined contribution pensions," says Stafford. "With defined benefit plans, people cannot get their hands on the money before they retire."

"Our analysis confirms what everyone suspected -- people are using their retirement accounts to help when their kids are going to college, or their spouse loses a job. Sure, many employers make participation mandatory but you can subvert your employer’s mandate by borrowing against the money for any number of reasons. So allowing pre-retirement access to these funds is a problem."

The research was supported by a grant from the U.S. Social Security Administration through the Michigan Retirement Research Center (MRRC) at the Institute for Social Research. Read the working paper:

Frank P. Stafford is coinvestigator of the Panel Study of Income Dynamics (PSID), senior research scientist in the Survey Research Center at the Institute for Social Research, and professor of economics at the University of Michigan. His research interests include household saving and human capital formation, and the impact of monetary policy on home ownership, household spending, and portfolio adjustment.