The Impact of Employment and Earnings Shocks on Contribution Behavior in Defined Contribution Plans: 2005–2009

Abstract

This article investigates the relationship between job changes and earnings changes and workers’ participation and contributions to defined contribution (DC) plans. We use longitudinal information from Social Security W-2 taxrecords matched to a nationally representative sample of respondents from the Survey of Income and Program Participation. Our findings reveal that both job changes and earnings losses lead to an increase in the probability of stopping contributions and to a decrease in contribution amounts and contribution rates. This pattern was true not only during the Great Recession of 2007-2009 but also during the nonrecessionary period prior to it, suggesting that contributions to DC plans are not necessarily driven by inertia but instead are quite dynamic and vary over time. Our simulations indicate that observed changes in contributions during the Great Recession are likely to have a nontrivial impact on retirement preparedness of future retirees, particularly for those who experienced job changes.