Defined Benefit vs. Defined Contribution Plans – Which Is Better at Achieving Successful Retirement?

Commentary

Defined Benefit vs. Defined Contribution Plans – Which Is Better at Achieving Successful Retirement?

Defined contribution (DC) plans are often perceived to be less effective than defined benefit (DB) plans at delivering retirement security, but recent research challenges this view. For example, a new study by the Center for Retirement Research at Boston College finds that the private sector’s shift to DC plans since the early 1980s has not led to lower overall retirement wealth.

A recent study from the Employee Benefit Research Institute examines the issue from another perspective. Rather than looking at aggregate retirement wealth only, the study analyzes how different income groups can achieve “successful” retirement (defined as achieving above certain income replacement rates) under DC plans versus DB plans. The analysis is based on simulating the percentage of “successful” retirements by income quartile for workers of age 25-29 who will have more than 30 years of simulated eligibility for participation in a DC plan.

The study finds that, under base-line assumptions, DB plans have a higher probability of achieving a 60 percent replacement rate than DC plans for workers in the first three income quartiles. However, at the 70 percent replacement rate, workers in the third and fourth income quartiles have a much higher chance of success with DC plans than with DB plans. And when the replacement rate is raised to 80 percent, DC plans deliver a significantly higher probability of success than DB plans for all income quartiles except for the lowest one, where the results are nearly even.

Truong Bui is a policy analyst at Reason Foundation, where he works on the Pension Integrity Project.