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How Will Defined Contribution Pension Plans Affect Retirement Income?

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  • Andrew A. Samwick
  • Jonathan Skinner

Abstract

How has the emergence of defined contribution pension plans, such as 401(k)s, affected the financial security of future retirees? We consider this question using a detailed survey of pension formulas in the Survey of Consumer Finances. Our simulations show that average and median pension benefits are higher under defined contribution plans that for defined benefit plans. Defined benefit plans are slightly better at providing minimum benefits, but for plausible values of risk aversion, a defined contribution plan drawn randomly from those available in 1995 is still preferred to a defined benefit plan drawn randomly from those available in 1983. This result is robust to different assumptions regarding the spending of defined contribution balances between jobs, equity rates of return, and the date of retirement. In short, we suggest that defined contribution plans can strengthen the financial security of retirees.

Suggested Citation

  • Andrew A. Samwick & Jonathan Skinner, 1998. "How Will Defined Contribution Pension Plans Affect Retirement Income?," NBER Working Papers 6645, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6645
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    References listed on IDEAS

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    Cited by:

    1. Besley, Timothy & Prat, Andrea, 2003. "Pension fund governance and the choice between defined benefit and defined contribution plans," LSE Research Online Documents on Economics 24853, London School of Economics and Political Science, LSE Library.
    2. Alan L. Gustman & Thomas L. Steinmeier, 1999. "Employer Provided Pension Data in the NLS Mature Women's Survey and in the Health and Retirement Study," NBER Working Papers 7174, National Bureau of Economic Research, Inc.
    3. James M. Poterba & Steven F. Venti, 2004. "The Transition to Personal Accounts and Increasing Retirement Wealth: Macro- and Microevidence," NBER Chapters, in: Perspectives on the Economics of Aging, pages 17-80, National Bureau of Economic Research, Inc.
    4. James M. Poterba & Andrew Samwick, 2001. "Household Portfolio Allocation over the Life Cycle," NBER Chapters, in: Aging Issues in the United States and Japan, pages 65-104, National Bureau of Economic Research, Inc.
    5. Jean Philippe Gaudemet, 2001. "Les dispositifs d'acquisition à titre facultatif d'annuités viagères en vue de la retraite : une diffusion limitée," Économie et Statistique, Programme National Persée, vol. 348(1), pages 81-106.
    6. James M. Poterba & Steven F. Venti, 1998. "Implications of Rising Personal Retirement Saving," NBER Chapters, in: Frontiers in the Economics of Aging, pages 125-172, National Bureau of Economic Research, Inc.
    7. James M. Poterba & Joshua Rauh & Steven F. Venti, 2005. "Utility Evaluation of Risk in Retirement Saving Accounts," NBER Chapters, in: Analyses in the Economics of Aging, pages 13-58, National Bureau of Economic Research, Inc.
    8. Purvi Sevak, 2002. "Wealth Shocks and Retirement Timing: Evidence from the Nineties," Working Papers wp027, University of Michigan, Michigan Retirement Research Center.
    9. Sule Kehinde Oluwatoyin & Emerole Gideon Ahamuefula, 2011. "The Impact of Assets Size and Profitability on Funded Status of Employee Retirement Benefits by Quoted Firms in Nigeria," Information Management and Business Review, AMH International, vol. 2(3), pages 125-132.
    10. Poterba, James M., 2002. "Taxation, risk-taking, and household portfolio behavior," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 17, pages 1109-1171, Elsevier.
    11. Bassett, William F. & Fleming, Michael J. & Rodrigues, Anthony P., 1998. "How Workers Use 401(K) Plans: The Participation, Contribution, and Withdrawal Decisions," National Tax Journal, National Tax Association;National Tax Journal, vol. 51(2), pages 263-289, June.
    12. Andrea Prat, 2003. "(UBS Pensions series 12) Pension Fund Governance and the Choice Between Defined Benefit and Defined Contribution Plans," FMG Discussion Papers dp454, Financial Markets Group.
    13. Armando Barrientos, 1998. "Supplementary pension coverage in Britain," Fiscal Studies, Institute for Fiscal Studies, vol. 19(4), pages 429-446, November.
    14. Alan L. Gustman & Olivia S. Mitchell & Andrew A. Samwick & Thomas L. Steinmeier, "undated". "Pension and Social Security Wealth in the Health and Retirement Study," Pension Research Council Working Papers 97-3, Wharton School Pension Research Council, University of Pennsylvania.

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    More about this item

    JEL classification:

    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination

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