How Has Shift to Defined Contribution Plans Affected Saving?

Many commentators – ourselves included – assert that people are saving less for retirement as a result of the shift from defined benefit to defined contribution plans. To support such an assertion, it would be nice to have counterfactual data showing what the world would look like today in terms of retirement saving if workers were still covered by defined benefit plans and compare that saving with actual contributions to defined contribution plans. But these data do not ex­ist. Furthermore, even if these data did exist, today’s more mobile workforce would make defined benefit plans a less effective way to save than they were in the past. So such an exercise simply is not feasible. Interestingly, it is possible to get some idea about what is going on by looking at the National Income and Product Accounts (NIPAs). These data used to show annual contributions to both defined benefit and defined contribution plans. Contributions to defined benefit plans, however, provided little infor­mation about pension saving because, when the stock market booms, employers’ contributions can drop to zero as they rely on investment returns to fund accruing benefits. In 2013, the government changed accounting for defined benefit plans from a cash basis to an accrual basis. That is, instead of reporting how much an employer contributes to a defined benefit plan, the NIPAs now report how much participants in a plan are accruing in benefits. This brief uses these new data to provide some insight on how pension sav­ing has changed over time. The discussion proceeds as follows. The first sec­tion describes the new NIPA data and how they allow for a more direct comparison of pension saving be­tween defined benefit plans and defined contribution plans. The second section focuses on defined benefit accruals and makes some adjustments to standardize for interest rates over time and to reflect the fact that the benefits are based on final earnings. The third section turns to the defined contribution data to better understand the pattern over time. The final section puts the two sides together. The conclusion is that after various adjustments, the percentage of salary going towards retirement saving has declined slightly. On the other hand, if returns on accumulations are included, the annual change in pension wealth appears to have remained relatively steady. In short, the NIPA data suggest that people are not accumulating less as the result of the shift from defined benefit to defined contribution plans. What has changed is not the amount of saving going on, but rather who is bearing the risk.