Does Increased Debt Offset 401k Savings?

Mobile Share Email Facebook Twitter LinkedIn

Roughly half of U.S. employers with a 401(k) plan enroll their workers automatically, deducting money from their paychecks for retirement unless they explicitly opt out of this arrangement. This strategy is widely viewed as a good way to get people to save.

But auto-enrollment might not be as effective as it seems, if individuals are compensating for a smaller paycheck by borrowing more.

A new study of civilian employees of the U.S. Army used credit and payroll data to gauge whether debt increased for employees who were automatically enrolled in the federal government’s retirement savings plan. The researchers compared changes in debt levels for people hired after the government’s 2010 adoption of auto-enrollment with hires prior to 2010.

The good news is that since the broadest debt category, which includes high-rate credit cards, did not increase, it did not offset the employees’ accumulated contributions. Their credit reports showed no increase in financial distress either, the study concluded.

However, the findings for car and home loans were ambiguous, so auto-enrollment “may raise these latter types of debt,” said the researchers, who are affiliated with NBER’s Retirement and Disability Research Center.

If workers are, in fact, borrowing more, the question, again, is whether the new debt is offsetting the additional savings under auto-enrollment. Auto and home loans – in contrast to credit cards – are used to finance an asset that has long-term value. Whether these forms of debt improve or erode net worth depends on the asset’s value and whether the value rises (say, a house in a growing city) or falls (a car after it’s driven off the lot).

The researchers did not have access to data on federal workers’ assets, which they would need to see what’s happening to their net worth. This remains an important question for future research.

To read the study, authored by John Beshears, James Choi, David Laibson, Brigitte Madrian, and William Skimmyhorn, see “Borrowing to Save? The Impact of Auto Enrollment on Debt.”   

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof. 

Thomas McGlinchey

There is great value in driving a clunker car (whether you buy it used or drive it until it is an antique) or buying a home appropriate to one’s ability to carry the debt (rather than keeping up with the Jones’).

This seems to be something lacking in financial education, in so far as it does not seem to enter into the culture – since there is so much counter education as the new cars are marketed or the local real estate market demands the newest kitchens, the fanciest baths.

Jack Towarnicky

The authors specifically confirm that they have no knowledge about whether automatic enrollment increases debt. So, why do you title this post as:

“… Does Increased Debt Offset 401k Savings? …”

They state: “… We observe only contribution flows into the TSP; we do not observe plan balances or the funds in which balances are invested. Furthermore, we do not observe withdrawals or loan transactions in the TSP. … and “… The implications of higher secured debt balances for net worth depend on what is happening to non-TSP assets on the household balance sheet, which we do not observe. …”

In a prior version of this study that reviewed automatic enrollment, they and the popular press focused on plan loans and withdrawals, concluding in part:

“… As tenure increases, so does the extent to which leakage offsets the savings increases from automatic enrollment, and eight years after hire, leakage, primarily in the form of plan loans, offsets 9-27% of the potential increased savings. …”

We followed up to highlight to the researchers that they had mis-characterized plan loans as leakage. Plan loans are not leakage unless they are not repaid. Generally speaking, almost 90% of plan loans are successfully repaid in full. And, all loans are at least partially repaid.


See also:

Note that in this version, they delete all discussion of plan loans and leakage, and account balances.

Your blog post would have been better titled had it incorporated some of the actual conclusions of the study: “… automatic enrollment … is successful at increasing contributions; … little of this accumulation is offset by increased debt … (with) “… no impact on credit scores or debt in third-party collections. … (there is) no statistically significant increase in auto and first mortgage debt … (however) our estimates of the first mortgage debt effect are wide, so automatic enrollment may raise these latter two types of debt…”

Comments are closed.