Household Borrowing and Shocks to Retirement Benefits
What happens when workers suffer a decrease in total wealth due to changes in their retirement plan’s benefit levels?
Individuals participating in the workforce face a complex trade-off between either consuming more now and working longer until retirement, or saving more now and being able to retire earlier. This trade-off is exacerbated when workers suffer an unanticipated reduction in their future retirement benefits. This paper examines how people who experienced such a reduction responded along two dimensions—how long they kept working until retiring and how much consumer credit they used.
This study was presented at the June 25, 2020, TIAA Institute Fellows Symposium. To view additional research that was presented, go to the 2020 Fellows Symposium Overview.
The author exploits a provision in a 2005 Texas pension reform act that “grandfathered” some workers into the former retirement benefit program, while reducing the benefits of other workers. To gauge the effects of a shock to retirement benefits, he compared public school employees who narrowly missed qualifying for the grandfather provision to those who barely qualified for the exemption.