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INTRODUCTION
As defined contribution plans have come to dominate the pension landscape, retirement income security increasingly depends on the ability and willingness of families to defer current consumption and save for their old age. In earlier generations, when traditional defined benefit plans were commonplace, many older people could rely on their employers to save on their behalf. Defined benefit plan participants have little say over the size of their pension benefits, which generally depend only on earnings and years of service. Typical defined benefit plans automatically enroll all eligible workers and rarely require explicit contributions from participants. Workers at firms that offer defined contribution plans, by contrast, must decide whether to participate in the plan, and participants much choose how much to set aside from each paycheck and invest in their retirement accounts. Future benefits depend on the level of contributions from participants and their employers and the returns that the contributions earn. Families must generally set aside funds over many years to accumulate significant retirement savings in their defined contribution plans.
However, families may be forced to delay or interrupt their retirement savings for a variety of reasons. For example, families may delay saving for retirement until after they purchase homes, focusing their efforts on accumulating enough savings for a downpayment before worrying about retirement. The expenses associated with a new baby may lead families to interrupt their retirement contributions near the birth of a child, especially if one parent spends less time at work in order to provide childcare. The loss of a spouse, through death or divorce, or a spell of unemployment by a spouse can also lead workers to curtail their retirement contributions and spend more of their earnings on current consumption. In addition, the onset of health problems for the worker or family members can derail savings plans, either because the family must pay expensive medical bills or because poor health forces family members to curtail their labor supply, lowering family income. In short, any increase in current consumption needs or loss of current income can reduce contributions to retirement plans and threaten future retirement security.
This study uses newly available longitudinal data to describe contributions to employer-sponsored retirement plans over time for a large, nationally representative sample of workers. The analysis examines the share and characteristics of workers who contribute to retirement plans and the level of their contributions. It describes the patterns of plan contributions over time and how spouses coordinate their contributions. The analysis also shows how key lifecourse events, such as the birth of a child, changes in marital status, and the purchase of a home, affect the level of participation in defined contribution plans.
The results confirm many significant relationships found in other research. For example, we find that about one-quarter of all workers contribute to employer-sponsored tax-deferred retirement accounts, and that the median contribution rate is about 6 percent of earnings. We also find that participation rates and contributions increase with age, education, and earnings. Contrary to other research, our results reveal a fair amount of individual variability in contribution rates over time, but negative shocks to income and increases in current consumption needs do not appear to lead workers to curtail their contributions. Instead, workers appear to raise their contribution rates after they have achieved key milestones in the lifecourse, such as the birth of a child or the purchase of a home.
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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
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