The comparative study examines how large pension institutions impact the long-term business cycle. It compared the effects of Social Security against market-based retirement vehicles such as 401(k) plans. The size of both these systems gives them a significant influence on the economy. According to the study, 93% of American workers are covered by Social Security and 63% posses 401(k)-type retirement plans.
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. Conversely, the study says Social Security helps to reign in the economy during periods of expansion, and stimulating it during recessions – a function known as an automatic stabilizer. According to study results, for every $1 increase in real GDP, 401(k) plans reduce government programs’ automatic stabilizing impact by 15%.
“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.”
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