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The economist’s simple life cycle model predicts that workers will respond to a $ 1 decrease in their defined benefit savings by increasing their supplemental savings by $ 1. If this prediction is true in practice, it can be very important to workers. state and local. Read: Saving for Retirement? Here are 4 key lessons
Although the common story is that these workers spend a full career in government
and retire with substantial defined benefit pensions, this is often not the case: not all plans are equally generous, many plans may lack the funds to pay for them. full benefits, and one in four public sector
workers are not covered by Social Security. Read: What is the best place to retire? Choose what matters most to you; You might be surprised.In other words, there are many reasons for state and local workers to increase their pensions with external savings, and all state workers and most local workers have access to supplemental defined contribution plans, i.e. 457 , 401 (k) s, 401 (a) s and 403 (b) s. To see if public workers take advantage of these options, my colleagues estimated the relationship between participation in a supplemental defined contribution plan, on the one hand, and low wealth accumulation in a defined benefit plan, low levels of plan funding, or lack of funds. Social Security coverage, on the other. To do this analysis, they merged individual-level data from the Program Participation and Income Survey (SIPP) with plan-level data from the Public Plans Database (PPD). Read: The 5 Most Affordable Caribbean Islands to Retire and 2 to Avoid Key results suggest that workers respond to low contributions to their primary defined benefit plan, the solid red bars
in Figure 1 below, but the magnitudes are small. For example, a one percentage point increase in the employer contribution rate is only associated with a 0.19 percentage point decrease in the participation rate, relative to a baseline of 21%. And the hatched bars
in Figure 1 show that workers do not respond at all to having a poorly funded pension plan or not having Social Security coverage.
The bottom line is that people don’t always respond as the theory suggests. State and local workers may simply not know how much they save through their defined benefit pension; they may not appreciate the extent to which your plan is adequately funded; and they may not understand the implications of not being covered by Social Security. Read: This sensible strategy can give you the retirement you want. Whatever the reason for the lack of response, states and localities cannot count on their workers to make up for reduced pension income through supplemental savings.