How Will Defined Contribution Pension Plans Affect Retirement Income?
43 Pages Posted: 13 Jun 1998
There are 2 versions of this paper
How Will Defined Contribution Pension Plans Affect Retirement Income?
How Will Defined Contribution Pension Plans Affect Retirement Income?
Date Written: June 1, 1998
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 than 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.
JEL Classification: J32, J14, D31
Suggested Citation: Suggested Citation
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