With more workers exposed to the stock market now than ever before – and increasingly through their participation in workplaces-sponsored retirement plans, it might be logical to anticipate that a sustained market drop would force many older workers to postpone retirement. Indeed, a recent study notes that retirement rates dropped by two percentage points in 2000, suggesting that such a response may have occurred.
As the anniversary of 1987’s “Black Monday’ nears, we might well wonder if a repeat would trigger a shift in retirement behaviors.
In “Bulls, Bears, and Retirement Decisions“, Courtney Coile and Phillip Levine took a look at the relationship (if any) between stock market performance and retirement behavior, paying particular attention to the boom and bust periods of the late 1990s and early 2000s, using data from the Current Population Survey, the Health and Retirement Study, and the Survey of Consumer Finances.
Retirement Rates Unaffected?
The authors note that retirement rates did not rise during the market boom of the late 1990s, even after adjusting for the effect of the strong economy. They also caution that since the sustained market decline only began in September 2000, the retirement response in late 2000 would had to have been very large to drive a two-point reduction for the year as a whole.
To determine the plausibility of a large response, they investigated the stock holdings of older households before the market decline. While two-thirds of these households had an individual retirement account (IRA) or 401(k)-type pension plan, fewer than half chose to invest it mostly or entirely in stocks. Moreover, typical stock holdings for these households were roughly equal to one year of household income. Thus for most families, even a sizeable drop in the stock market would result in a relatively small loss and be unlikely to trigger a change in retirement behavior, according to the report. .
They then compared the effect of the stock market on the retirement behavior of individuals likely to have been differentially affected by changes in the market, such as people with and without 401(k)-type pension plans. If stock market performance affects retirement, then those who are more likely to own stocks should be more likely to retire in the boom period and less likely to retire during the bust, according to their hypothesis.
However, they found little support in the data for this conclusion. On the contrary, the drop in retirement rates in the bust period is smaller for people who are more likely to own stocks. Moreover, there is no evidence of a greater rise in retirement rates in the boom period for those who are more likely to own stocks. Ultimately, the authors were unable to find any relationship between stock market exposure and labor force re-entry decisions.
As a result, the authors conclude that there is little evidence that the stock market affects retirement or labor force re-entry – a result they attribute to the relatively small number of older workers with large stock holdings, acknowledging that some individuals who experienced large gains or losses due to market fluctuations may certainly have responded. As for that as yet unexplained drop in retirement rates in the year 2000? The authors suggest that the drop in wealth from the market crash may have been reflected primarily in changes in consumption and other behaviors.