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The Effects of Vesting and Locking in Pension Assets on Participation in Employer-Sponsored Pension Plans

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Abstract

This study assesses whether pension vesting and lock-in regulations affect participation in employer-sponsored pension plans. Specifically, the effects of Canadian reforms enacted during the 1980s and 1990s are investigated, which reduced vesting and lock-in requirements from employees being at least 45 years old and having ten years of continuous plan membership to two years of membership irrespective of age. To credibly identify these effects, the analysis exploits inter-provincial variation in the timing of the pension reforms using a difference-in-differences approach. The results show that employees aged 25–54 responded positively to the added protection of their pension wealth by increasing plan participation, despite the general trend of declining occupational pension coverage during this time. However, these changes also crowded out contributions to other retirement savings accounts. The implications of these findings for the optimal design of private pension systems are discussed.

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Notes

  1. See, for example, Gustman et al. (1994) for an earlier survey of this literature.

  2. Tighter lock-in regulations may be desirable for employees with sophisticated present-biased time preferences, this being an implication of behavioral life-cycle consumption models (Laibson 1997; Gul and Pesendorfer 2001).

  3. In Canada, the predominant type of EPP is called a registered pension plan (RPP). These programs may be defined-benefit, defined-contribution, or hybrid arrangements for employers to provide pension benefits to their employees upon retirement in the form of periodic payments. RPPs offer front-loaded incentives to contribute, in other words employee contributions are tax-deductible and employer contributions are non-taxable; the taxes are paid on income when funds are eventually withdrawn from the accounts (similar to 401(k)s in the United States). The majority of RPPs in Canada are defined-benefit arrangements (Drolet and Morissette 2014).

  4. Several studies that estimate the effects of EPPs on total savings include: Sillamaa and Veall (2001), Veall (2001), Milligan (2002), and Messacar (2015) for Canada; Poterba et al. (1994, 1995), Engen et al. (1994, 1996), Venti and Wise (1996), Gale (1998), Benjamin (2003), Engelhardt and Kumar (2011), and Gelber (2011) for the United States; and Alessie et al. (1997), Euwals (2000), and Chetty et al. (2014) for European countries. Bernheim (2002) provides a comprehensive survey of this literature, and considers the factors that vary across these studies that may contribute to their differences in results.

  5. RRSPs are tax-preferred accounts that individuals set up and maintain through financial institutions, which provide front-loaded incentives to contribute (similar to individuals retirement accounts [IRAs] in the United States). RRSPs are widely-used even among EPP members; for example, Messacar (2015) estimates that approximately half of EPP members contribute to RRSPs in a given year among a sample of frequent tax filers spanning 1991–2010.

  6. Employee contributions to EPPs are observed since 1986 in administrative tax records. However, Morissette and Ostrovsky (2006) show that the omission of employer contributions leads to significant under-estimation of EPP coverage, of up to 17% for men aged 35–54 and 11% for women aged 35–54, since many plans are financed entirely by the employers. Other studies that assess trends in EPP coverage through the 1980s and 1990s include Morissette and Drolet (2000) and Morissette and Ostrovsky (2006, 2007).

  7. Using more dimensions (notably educational attainment) would increase the number of groups to the point where the sample sizes within cells become too small to draw meaningful inferences.

  8. Unfortunately no dataset exists that combines detailed income and expenditures information with a wide range of years and observations to implement this study. The LMAS and SLID provide many years of observations but lack expenditures data, whereas the FAMEX and SHS were carried out infrequently. As the analysis will show, below, the main findings are reproducible in both datasets.

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Authors and Affiliations

  1. Social Analysis and Modelling Division, Statistics Canada, 100 Tunney’s Pasture Driveway, Ottawa, ON, K1A 0T6, Canada

    Derek Messacar

  2. Department of Economics, Memorial University of Newfoundland, 230 Elizabeth Avenue, St. John’s, Newfoundland and Labrador, A1B 1T5, Canada

    Derek Messacar

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Correspondence to Derek Messacar.

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This article is based on a study carried out while the author was a Ph.D. candidate in the Department of Economics at the University of Toronto. The author thanks Dwayne Benjamin and Kory Kroft for helpful comments provided on an earlier version of this article, as well as Shin-Yi Chou and the referees for the valuable suggestions. The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Statistics Canada or the Government of Canada.

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Messacar, D. The Effects of Vesting and Locking in Pension Assets on Participation in Employer-Sponsored Pension Plans. J Labor Res 39, 178–200 (2018). https://doi.org/10.1007/s12122-018-9265-z

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