401(k)'s and Household Saving

Syracuse University, Syracuse NY

Investigators

Abstract

The primary private vehicle for retirement saving in the United States is the 401(k)-type pension arrangement. With emphasis on elective contributions, payroll deduction, employer matching, and personally-directed investment, 401(k)'s have been touted as an important public policy that raises household saving and retirement income adequacy. A highly influential body of research has indicated 401(k)'s have had substantial effects on saving: based on the Surveys of Income and Program Participation (SIPP), saving in financial assets increased at least one dollar for every dollar saved through a 401(k). However, these findings have been debated hotly. In particular, the previous analyses used no information on the two most important forms of retirement saving: pensions and Social Security. This project improves on existing research in this important area by using: (1) the superior respondent-reported and firm-reported pension information and the Social Security Administration (SSA) matched Social Security wealth in the Health and Retirement Study (HRS) to measure the extent to which 401(k)'s have increased retirement saving, not just financial asset saving; (2) the HRS Pension Provider Survey (PPS) to measure 401 (k) eligibility and pension entitlements precisely and evaluate the extent of error in respondent-reported information on 401(k)'s, and transmit these methodological findings to the research community; and (3) the HRS Pension Provider Survey (PPS) to estimate the effect of employer matching on 401(k) saving, precisely measuring match rates and explicitly accounting for kinked budget sets and measurement error in contribution limits. This project also improves the empirical methods used in this area and advances our understanding of the role of federal tax and pension policy on retirement saving and income adequacy.