Workers' Response to the Market Crash: Save More, Work More?

The stock market crash of 2008 significantly dimmed the retirement prospects of workers approaching retirement. These workers are heavily dependent on 401(k) plans, as opposed to traditional defined benefit pensions, as a source of retirement income. During the economic downturn, these plans lost about one-third of their value. Even before the crash, many older workers lacked the assets needed to enjoy a comfortable retirement.

The rational response to a sharp decline in retirement wealth is to spread the pain – save more, work longer, and consume less in retirement – to the point where the incremental pain from each response is the same. The extent to which workers are absorbing a portion of the loss by saving more and working longer is thus critical for assessing their retirement prospects.

To address these questions, in the summer of 2009, the Center for Retirement Research at Boston College (CRR) surveyed workers approaching retirement, age 45 to 59, on changes in retirement saving and expected retirement ages. The survey also collected data on the many factors that could affect how workers respond to the downturn, including financial and employment characteristics, emotional reactions to the downturn, and enhanced financial literacy.