The Labor Market Risks of Individual Accounts for Retirement

Abstract

As society is growing older, retirement income needs are also rising. To address the need for more retirement savings, public policy has mainly focused on promoting tax advantaged individual accounts, such as IRAs or 401(k)s. Typically, individual accounts involve greater risks and greater costs than pooled savings vehicles, such as defined benefit (DB) pension plans, which may be offset by other benefits. However, a cost that has not received much attention is the fact that workers are subject to varying income fluctuations during business cycles and over their careers based on demographic characteristics. These income fluctuations are not randomly distributed, however; some workers are more likely than others to see larger fluctuations.