How Will Defined Contribution Pension Plans Affect Retirement Income?

44 Pages Posted: 19 Jul 2000 Last revised: 10 Oct 2010

See all articles by Andrew A. Samwick

Andrew A. Samwick

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Jonathan S. Skinner

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: July 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 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

Samwick, Andrew A. and Skinner, Jonathan S., How Will Defined Contribution Pension Plans Affect Retirement Income? (July 1998). NBER Working Paper No. w6645, Available at SSRN: https://ssrn.com/abstract=226351

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Jonathan S. Skinner

Dartmouth College - Department of Economics ( email )

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United States
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National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States
603-646-2535 (Phone)

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