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Asynchronous Risk: Unemployment, Equity Markets, and Retirement Savings

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  • Jason S. Seligman

    () (University of Georgia)

  • Jeffrey B. Wenger

    (University of Georgia)

Abstract

The link between unemployment and pension accumulations is conceptually straightforward; periods of unemployment lead to lower pension contributions, and thus to lower accumulations. However, impacts on accumulation may differ as a result of the timing and frequency of unemployment spells. We hypothesize that unemployment is more likely during periods in which the equities market experiences greater than average returns, largely due to a lead/lag structure of the stock and labor markets, respectively. This would imply that workers may systematically miss opportunities to purchase equities through DC plans when prices are relatively low. To test this hypothesis, we match historic stock returns to stochastically generated unemployment spells for men and women across the earnings distribution. We find lower income workers suffer greater percentage losses in retirement savings as a result of more frequent spells of unemployment. Higher income worker losses are more greatly affected by the timing of unemployment relative to the equities market.

Suggested Citation

  • Jason S. Seligman & Jeffrey B. Wenger, 2005. "Asynchronous Risk: Unemployment, Equity Markets, and Retirement Savings," Upjohn Working Papers and Journal Articles 05-114, W.E. Upjohn Institute for Employment Research.
  • Handle: RePEc:upj:weupjo:05-114
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    References listed on IDEAS

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    1. Francisco Gomes & Alexander Michaelides, 2003. "Portfolio Choice With Internal Habit Formation: A Life-Cycle Model With Uninsurable Labor Income Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 729-766, October.
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    5. Jeffrey Brown, 2001. "Are the Elderly Really Over-Annuitized? New Evidence on Life Insurance and Bequests," NBER Chapters,in: Themes in the Economics of Aging, pages 91-126 National Bureau of Economic Research, Inc.
    6. Burman, Leonard E. & Coe, Norma B. & Gale, William G., 1999. "Lump Sum Distributions From Pension Plans: Recent Evidence and Issues for Policy and Research," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(3), pages 553-562, September.
    7. Param Silvapulle & Mervyn J Silvapulle, 1997. "Business Cycle Asymmetry and the Stock Market," Working Papers 1997.22, School of Economics, La Trobe University.
    8. Burman, Leonard E. & Coe, Norma B. & Gale, William G., 1999. "Lump Sum Distributions from Pension Plans: Recent Evidence and Issues for Policy and Research," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 553-62, September.
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    Keywords

    Unemployment; retirement; savings; defined contribution; pensions; earnings distribution;

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