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Asynchronous risk: retirement savings, equity markets, and unemployment

Published online by Cambridge University Press:  23 August 2006

JASON S. SELIGMAN  and
JEFFREY B. WENGER
JASON S. SELIGMAN
Affiliation:
Institute of Government and Department of Economics, University of Georgia, 201 N Milledge Ave, Athens, GA 30602 (email: seligman@cviog.uga.edu)
JEFFREY B. WENGER
Affiliation:
School of Public and International Affairs, Department of Public Administration and Policy, University of Georgia
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Abstract

Retirement savings in defined contribution plans vary as a result of the timing and frequency of unemployment spells. We hypothesize that unemployment is coincident with negative shocks to equities prices, implying workers may systematically miss investment opportunities. First we match historic stock returns to unemployment hazards by gender, and earnings quartile. Next we test the relationship between unemployment, equity returns, and pension savings, by repeated simulation. Finally, we find that the timing of unemployment spells amplifies retirement savings losses on average for all worker-types in our analysis. Timing impacts are observed to be largest for high earnings workers and to increase with unemployment losses disproportionately.

Type
Research Article
Information
Journal of Pension Economics & Finance , Volume 5 , Issue 3 , November 2006 , pp. 237 - 255
Copyright
2006 Cambridge University Press

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Footnotes

The authors would like to thank seminar participants at the RAND Corporation, University of Georgia, UC Santa Cruz, and UC Berkeley for their contributions to this work, and in particular, Alan Auerbach, Carlos Dobkin, Michael Hurd, Nicole Maestas, Jim Poterba, Karl Scholz, James Smith, and Ben Zipperer, who assisted with analysis of the SIPP data. Seligman gratefully acknowledges partial funding of this work by the W. E. Upjohn Institute for Employment Research.