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The Transition to Personal Accounts and Increasing Retirement Wealth: Macro- and Microevidence

In: Perspectives on the Economics of Aging

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  • James M. Poterba
  • Steven F. Venti

Abstract

Retirement saving has changed dramatically over the last two decades. There has been a shift from employer-managed defined benefit pensions to defined contribution retirement saving plans that are largely controlled by employees. In 1980, 92 percent of private retirement saving contributions were to employer-based plans and 64 percent of these contributions were to defined benefit plans. Today, about 85 percent of private contributions are to plans in which individuals decide how much to contribute to the plan, how to invest plan assets and how and when to withdraw money from the plan. In this paper we use both macro and micro data to describe the change in retirement assets and in retirement saving. We give particular attention to the possible substitution of pension assets in one plan for assets in another plan such as the substitution of 401(k) assets for defined benefit plan assets. Aggregate data show that between 1975 and 1999 assets to support retirement increased about five-fold relative to wage and salary income. This increase suggests large increases in the wealth of future retirees. The enormous increase in defined contribution plan assets dwarfed any potential displacement of defined benefit plan assets. In addition, in recent years the annual 'retirement plan contribution rate,' defined as retirement plan contributions as a percentage of NIPA personal income, has been over 5 percent. This is much higher than the NIPA total personal saving rate, which has been close to zero. Retirement saving as a share of personal income today would likely be at least one percentage point greater had it not been for legislation in the 1980s that limited employer contributions to defined benefit pension plans, and the reduction in defined benefit plan contributions associated with the rising stock market of the 1990s. It is also likely that the 'retirement plan contribution rate' would be much higher today if it were not for the 1986 retrenchment of the IRA program. Risi

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This chapter was published in:

  • David A. Wise, 2004. "Perspectives on the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise04-1, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10340.

    Handle: RePEc:nbr:nberch:10340

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    References

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    1. James M. Poterba & Steven F. Venti & David A. Wise, 1996. "How Retirement Saving Programs Increase Saving," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 10(4), pages 91-112, Fall.
    2. Poterba, James M. & Venti, Steven F. & Wise, David A., 1995. "Do 401(k) contributions crowd out other personal saving?," Journal of Public Economics, Elsevier, Elsevier, vol. 58(1), pages 1-32, September.
    3. James M. Poterba & Steven F. Venti, 1998. "Implications of Rising Personal Retirement Saving," NBER Chapters, National Bureau of Economic Research, Inc, in: Frontiers in the Economics of Aging, pages 125-172 National Bureau of Economic Research, Inc.
    4. James H. Stock & David A. Wise, 1988. "The Pension Inducement to Retire: An Option Value Analysis," NBER Working Papers 2660, National Bureau of Economic Research, Inc.
    5. Laurence J. Kotlikoff & David A. Wise, 1987. "Employee Retirement and a Firm's Pension Plan," NBER Working Papers 2323, National Bureau of Economic Research, Inc.
    6. Leslie E. Papke & Mitchell Petersen & James M. Poterba, 1993. "Did 401(k) Plans Replace Other Employer Provided Pensions?," NBER Working Papers 4501, National Bureau of Economic Research, Inc.
    7. Stock, James H & Wise, David A, 1990. "Pensions, the Option Value of Work, and Retirement," Econometrica, Econometric Society, Econometric Society, vol. 58(5), pages 1151-80, September.
    8. Edward P. Lazear, 1983. "Incentive Effects of Pensions," NBER Working Papers 1126, National Bureau of Economic Research, Inc.
    9. Gruber, Jonathan & Wise, David A. (ed.), 1999. "Social Security and Retirement around the World," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226310114, 01-2013.
    10. 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.
    11. James M. Poterba & Steven F. Venti, 1998. "Personal Retirement Saving Programs and Asset Accumulation: Reconciling the Evidence," NBER Chapters, National Bureau of Economic Research, Inc, in: Frontiers in the Economics of Aging, pages 23-124 National Bureau of Economic Research, Inc.
    12. Leslie E. Papke, 1996. "Are 401(k) Plans Replacing Other Employer-Provided Pensions? Evidence from Panel Data," NBER Working Papers 5736, National Bureau of Economic Research, Inc.
    13. Zvi Bodie & John B. Shoven & David A. Wise, 1987. "Issues in Pension Economics," NBER Books, National Bureau of Economic Research, Inc, number bodi87-1, July.
    14. B. Douglas Bernheim & John B. Shoven, 1985. "Pension Funding and Saving," NBER Working Papers 1622, National Bureau of Economic Research, Inc.
    15. Robin L. Lumsdaine & James H. Stock & David A. Wise, 1990. "Three Models of Retirement: Computational Complexity Versus Predictive Validity," NBER Working Papers 3558, National Bureau of Economic Research, Inc.
    16. Annamaria Lusardi & Jonathan Skinner & Steven F. Venti, 2001. "Saving Puzzles and Saving Policies in the United States," JCPR Working Papers, Northwestern University/University of Chicago Joint Center for Poverty Research 220, Northwestern University/University of Chicago Joint Center for Poverty Research.
    17. Laurence J. Kotlikoff & David A. Wise, 1987. "The Incentive Effects of Private Pension Plans," NBER Chapters, National Bureau of Economic Research, Inc, in: Issues in Pension Economics, pages 283-340 National Bureau of Economic Research, Inc.
    18. Eric M. Engen & William G. Gale, 2000. "The Effects of 401(k) Plans on Household Wealth: Differences Across Earnings Groups," NBER Working Papers 8032, National Bureau of Economic Research, Inc.
    19. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
    20. James M. Poterba & Steven F. Venti, 2001. "Preretirement Cashouts and Foregone Retirement Saving: Implications for 401(k) Asset Accumulation," NBER Chapters, National Bureau of Economic Research, Inc, in: Themes in the Economics of Aging, pages 23-58 National Bureau of Economic Research, Inc.
    21. William G. Gale & John Sabelhaus, 1999. "Perspectives on the Household Saving Rate," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 181-224.
    22. Laurence J. Kotlikoff & David A. Wise, 1988. "Pension Backloading, Implicit Wage Taxes, and Work Disincentives," NBER Chapters, National Bureau of Economic Research, Inc, in: Tax Policy and the Economy: Volume 2, pages 161-196 National Bureau of Economic Research, Inc.
    23. Zvi Bodie & John B. Shoven & David A. Wise, 1988. "Pensions in the U.S. Economy," NBER Books, National Bureau of Economic Research, Inc, number bodi88-1, July.
    24. Lumsdaine, Robin L. & Stock, James H. & Wise, David A., 1990. "Efficient windows and labor force reduction," Journal of Public Economics, Elsevier, Elsevier, vol. 43(2), pages 131-159, November.
    25. Gary Burtless & Joseph F. Quinn, 2000. "Retirement Trends and Policies to Encourage Work Among Older Americans," Boston College Working Papers in Economics, Boston College Department of Economics 436, Boston College Department of Economics.
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