Pensions

In Eating The Seed Corn I wrote about AI's destruction of entry-level jobs. But Karen Weise's Microsoft Offers Buyouts to 60,000 Employees as It Spends on A.I. reports on a different impact (my emphasis):

Microsoft on Monday offered buyouts to a quarter of its work force, the latest effort by the company to rein in costs as it spends heavily on artificial intelligence.
...
The “time-limited, voluntary” program grew out of the company’s first ever buyouts earlier this year, she wrote. In April, Microsoft offered early retirement to 8,600 long-tenured U.S. employees, and about 30 percent accepted the packages and left over the summer. Microsoft said it heard from additional employees who would have taken the buyout if they had been eligible. That informed the company’s decision to create this new, expanded program.

Microsoft expects many fewer acceptances in this new program, but the people leaving are not entry-level, they are well-paid senior staff. If the goal is to divert cash from salaries to capex getting rid of senior staff is much more effective.

Below the fold I look into the non-obvious implications of AI's impact on well-paid employees' jobs.

The buyout program isn't the only predator stalking Microsoft's employees:

Microsoft has already slightly shrunk its work force even as business has boomed. For several years, the company maintained a flat head count of about 228,000 employees.

But as of June 30, the end of its fiscal year, Microsoft’s work force had edged lower to 223,000 employees. Over that same fiscal year, Microsoft brought in $332 billion in revenue, up 18 percent from the previous year, and profit grew 31 percent to $134 billion.

In July, Microsoft announced it was cutting 4,800 jobs, particularly in its video game division. The company is scheduled to report quarterly results on Wednesday.

Many of these lost jobs will have been lower on Microsoft's pay scale, but still well-paid relative to the US average. The victims will have lost not only their salary, but also after a delay their health insurance. Crucially for this post, their and Microcoft's contributions to their 401(k) pension will have stopped. In the current economy they will struggle to find a new job.

Is this just a problem for the victims? In The Retirement Machine: AI, high earners, and the hidden risk to global stock markets Duncan Lamont asks:

how consequential would it be for equities if the US experienced a rise in AI-linked unemployment among high earners which led to a fall in pension contributions.

This turns out to be a really interesting question. Lamont writes:

In their AI-boom scenario, our economists model unemployment rising to 10% as workers are displaced by technology. Importantly, whereas past technological revolutions have displaced lower earners, this time higher-earning white-collar workers are in the firing line. And they are the ones who disproportionately contribute to the monthly pension flows into equity markets. This article puts numbers on just how material a risk this is. Spoiler alert: it’s big.

Lamont Figure 1

US pensions are a seriously big business. Lamont's Figure 1 shows that the value of US pensions investments are 47% bigger than all non-US stock markets combined, ond 82% of the US stock market. Lamont points out that:

The (dollar-weighted) average allocation to equities across 401(k)s is 75%. Younger individuals have more, with those in their 20s having 90% on average but even those in their 60s still hold over 60%.

How big are the "monthly pension flows into equity markets"? Lamont looks at 2024:

Assuming the 75% equity allocation also applies to new contributions, US DC plans and IRAs funnelled around $735 billion into global equity markets in 2024. Given the US weight in the global stock market and typical [target duration fund] allocations, 60-70% of that will have gone into US equities, translating into approximately $480 billion. DC and IRA pension accounts bought an estimated nearly half a trillion dollars of US equities in 2024.

DC (Defined Contribution) plans are 401(k) and similar plans to which employees and (typically) companies contribute monthly. Lamont estiimates that their purchases represent about 26% of the net purchases of US equities that year. Because this is a steady, predictable demand it plays a major role in keeping the US stock market growing in good times and cushions the fall in bad times.

Lamont Figure 3

Which employees contribute to DC plans? Lamont's Figure 3 shows that participation is much higher in industries that pay well. So there aren't just more of them, but they contribute more each month. The 26% keeping the US market afloat depends heavily upon the contributions of higher-paid employees.

Lamont cites evidence to support this skew. First:

The Congressional Budget Office’s most recent comprehensive distributional analysis of retirement-related tax expenditures — the closest available proxy for the distribution of contribution dollars — found the highest-income quintile captured 63% of the tax benefits in 2019, against 1% for the bottom quintile. The tax-benefit share will overstate the contribution share to some extent because higher earners face higher marginal tax rates. Even so, this is broadly consistent with IRS data which shows that 62% of contributions to IRAs in 2023 came from people earning over $100k a year. Only about 15% came from people earning what was then the median income of around $50k or less.

Lamont Figure 4

And second:

There is also direct evidence from within company plans. As Figure 4 shows, the best paid 20% of employees at a given firm have, on average, taken in 44% of employer contributions.

It is these these top earners who are at risk:

A growing body of research reaches the same broad conclusion: higher-income, white collar occupations requiring postsecondary education show the highest exposure to AI capabilities (Brynjolfsson and others (2018); Webb (2020); Muro and others (2019); Felten and others (2023); Eloundou and others (2024); Kinder and others (2024); and Hampole and others (2025)).

Dodini & Smith Chart 3

As I disucussed in Eating The Seed Corn, Stanford reseach concludes:

1. We find no evidence of widespread, economy-wide job displacement.
2. However, employment of young workers (ages 22–25) in AI-exposed occupations now stands 19% below where it would be had it kept pace with that of their less-exposed peers; experienced workers show no comparable gap.
3. This divergence has widened steadily since we first documented it in August 2025.
4. It operates primarily through reduced hiring of young workers rather than increased separations.

Lamont points out that this isn't good news:

You could take the junior-first pattern that the data currently shows as reassurance for the pension channel since junior workers contribute less than managing directors. But that would be naive. Junior workers in high-paying industries are still high earners by economy-wide standards. A 25-year-old software engineer on $140,000, or a first-year banking analyst on $120,000, sits comfortably in the top quintile of all US earners. The displacement happening right now is concentrated in industries where even the juniors out-earn the median American worker by a factor of two. These are exactly the contributors identified earlier. In addition, participants in their 20s hold 90% equity on average, the highest allocation of any age cohort. So even a junior-first shock would hit a group whose pension contributions are unusually equity-heavy.

Just as importantly, junior-first describes where current AI tools are biting first. We don’t know where it will end. The substitution frontier has moved up the capability curve every year since 2022, and there is no obvious reason to expect it to stop at the entry level.

After staring at the barrage of AI adds on the London Tube in summer 2025, I wrote The Selling Of AI:

The irresistible pitch to CEOs is that they can "do more with less", or in other words they can lay off all these troublesome employees without impacting their products and sales.

The effect is that CEOs will fire the workers first based on the ads and the hype, before finding out whether the AI agents can really replace them, and when they find out they can't will be unwilling, and unable to afford, to hire them back. And if they hype is right the upward movement of the "substitution frontier" will have the same effect — hugher unemployment for longer.

Either way the result will be a reduction of the flow of pension funds into the stock market. Lamont estimates:

A 10% hit to that exposed flow would remove roughly $20–30 billion of annual equity buying; a 25% hit would remove $50–75 billion; a 50% hit would remove $100–150 billion. In a normal year that is material. In a downturn, when buybacks, foreign demand and retail risk appetite are likely to weaken at the same time, it could matter a lot more.

As I write this the financial press is flooded with headlines such as:

• Stocks Slump as Wall Street Gets AI Wake-Up Call
• Amazon, Alphabet, SpaceX, and Meta are all to blame for the new tech stock rout
• Tech Stocks Tumble, but Broader Market Is Holding On
• Nasdaq 100 Hits Third Correction of 2026 on Unwinding Tech Stock Bets
• Meta, Alphabet, Intel Share Sales Leave Buyers Far Underwater
• US Tech Stocks Enter Correction on AI and Midterm Election Risks

The downturn may have already started.