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How Will Defined Contribution Pension Plans Affect Retirement Income?

  • Andrew A. Samwick
  • Jonathan Skinner

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6645.

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Date of creation: Jul 1998
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Publication status: published as Samwick, Andrew A. and Jonathan Skinner. "How Will 401(k) Pension Plans Affect Retirement Income?," American Economic Review, 2004, v94(1,Mar), 329-343.
Handle: RePEc:nbr:nberwo:6645
Note: AG PE
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  1. Eric M. Engen & William G. Gale & John Karl Scholz, 1996. "The Illusory Effects of Saving Incentives on Saving," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 113-138, Fall.
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  3. Zvi Bodie & Alan J. Marcus & Robert C. Merton, 1988. "Defined Benefit versus Defined Contribution Pension Plans: What are the Real Trade-offs?," NBER Chapters, in: Pensions in the U.S. Economy, pages 139-162 National Bureau of Economic Research, Inc.
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  8. Laurence J. Kotlikoff & David A. Wise, 1987. "The Incentive Effects of Private Pension Plans," NBER Working Papers 1510, National Bureau of Economic Research, Inc.
  9. Andrew A. Samwick & Jonathan Skinner, 1996. "Abandoning the Nest Egg? 401(k) Plans and Inadequate Pension Saving," NBER Working Papers 5568, National Bureau of Economic Research, Inc.
  10. Alan L. Gustman & Thomas L. Steinmeier, 1983. "A Structural Retirement Model," NBER Working Papers 1237, National Bureau of Economic Research, Inc.
  11. James M. Poterba & Steven F. Venti & David A. Wise, 1995. "Lump-Sum Distributions from Retirement Saving Plans: Receipt and Utilization," NBER Working Papers 5298, National Bureau of Economic Research, Inc.
  12. Zvi Bodie & John B. Shoven & David A. Wise, 1987. "Issues in Pension Economics," NBER Books, National Bureau of Economic Research, Inc, number bodi87-1, May.
  13. Murphy, Kevin M & Welch, Finis, 1990. "Empirical Age-Earnings Profiles," Journal of Labor Economics, University of Chicago Press, vol. 8(2), pages 202-29, April.
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  15. Leslie E. Papke, 1999. "Are 401(k) Plans Replacing Other Employer-Provided Pensions? Evidence from Panel Data," Journal of Human Resources, University of Wisconsin Press, vol. 34(2), pages 346-368.
  16. Stock, James H & Wise, David A, 1990. "Pensions, the Option Value of Work, and Retirement," Econometrica, Econometric Society, vol. 58(5), pages 1151-80, September.
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