NEW SCHOOL STUDY: 401(K) PLANS MAGNIFY EFFECTS OF RECESSION, DE-STABILIZE ECONOMY
FIRST-EVER COMPARATIVE STUDY OF PENSIONS' IMPACT ON THE BUSINESS CYCLE

401(K) plans reduce the stabilizing effects of government programs by 15%
Full study available at www.economicpolicyresearch.org/retirement-security.html

Teresa Ghilarducci, Schwartz Center for Economic Policy Analysis, The New School for Social Research (Photo: Jerry Speier)

"This study makes it clear that the private sector's historic transition towards market-based retirement plans and away from traditional pensions has not only harmed investors who lost their savings in the Great Recession, but injured the overall economy," said Teresa Ghilarducci, SCEPA Director. "In fact, 401(k)s not only de-stabilize the economy, they significantly undermine the benefits of other stabilizing programs, including the federal income tax, unemployment insurance, and Medicare and disability insurance."

As the first-ever comparative study of how large pension institutions impact the long-term business cycle, the study compares the effects of Social Security against market-based retirement vehicles such as 401(k) plans. The size of both of these systems - 93% of American workers are covered by Social Security, and 63% possess 401(k)-type retirement plans - gives them a significant influence on the economy.

The study finds that market-based retirement accounts increase the volatility of the business cycle, contributing to an overheating of the economy during expansive periods and exacerbating economic contraction during recessionary spells. On the other hand, Social Security helps to reign in the economy during periods of expansion, and stimulating it during recessions - a function known as an automatic stabilizer. The study finds that for every $1 increase in real GDP, 401(k) plans reduce government programs' automatic stabilizing impact by 15%.

"Our study provides hard proof that 401(k)s are a lose-lose for both individuals and the economy. They expose individuals' retirement savings to market risk and hurt the economy's overall ability to create jobs and spur consumption," said Ghilarducci. "Economists of all stripes understand the importance of automatic stabilizers to the economy. Now is the time for policy makers to follow by addressing the unintended consequences of incentivizing market-based retirement accounts at the expense of programs that are a win-win for everyone, including traditional pensions and Social Security."

ABOUT THE SCHWARTZ CENTER FOR ECONOMIC POLICY ANALYSIS (SCEPA)
SCEPA works to focus the public economics debate on the role government can and should play in the real productive economy - that of business, management, and labor - to raise living standards, create economic security, and attain full employment. With a focus on collaboration and outreach, SCEPA provides original, standards-based research to engage the public, opinion leaders and elected officials in the discussion of how to create a more stable, equitable, and prosperous economy. For more information, visit www.economicpolicyresearch.org.

ABOUT THE NEW SCHOOL
The New School, based in the heart of New York City's Greenwich Village, is a legendary, progressive university inspiring undergraduates, graduate students and others to catalyze change in an inconstant world. Founded in 1919 as a hub of intellectual freedom by a group that included Charles Beard, James Harvey Robinson, John Dewey, and Thorstein Veblen, The New School today is a major degree-granting university comprised of distinct academic divisions. The university's 10,500 students are enrolled in 88 degree programs in the humanities and social sciences, design, administration and management, and the performing arts. In addition, the university's campus welcomes 3,544 adult learners in more than 650 continuing education courses every year. The New School holds hundreds of public programs that exemplify its commitment to democratic practice and social justice. For more information, visit www.newschool.edu.

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