Shift to Defined Contribution Plans Has Not Led to Lower Pension Wealth

Commentary

Shift to Defined Contribution Plans Has Not Led to Lower Pension Wealth

One common objection to pension reform that seeks to replace defined benefit (DB) plans with defined contribution (DC) plans is that such a shift will reduce retirement savings and consequently lessen retirement benefits for workers. A recent paper by Alicia Munnell et al. at the Center for Retirement Research at Boston College casts doubt on this claim.

The paper sets out to examine whether the shift to DC plans in the private sector since the early 1980s has led to lower retirement saving and wealth accumulation. To do this, the authors start by looking at the sum of DB benefit accruals and DC contributions as a percentage of private wages over time, using the new data from National Income and Product Accounts. For DB benefit accruals, a constant discount rate of 5.5 percent is used to revalue the accruals, measured by the change in the projected benefit obligation. Total DC contributions are determined by combining participant contributions, employer 401(k) contributions, and employer non-401(k) contributions, with leakages taken into account.

The paper finds that the decline in DB accruals has not been fully offset by the rise in DC contributions, resulting in a slight decrease in overall retirement saving. However, when investment returns are taken into consideration, the annual change in pension wealth has remained stable over time, thanks to higher returns associated with riskier investments for 401(k) plans.

To read the full paper, go here.

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