The Transition from Defined Benefit to Defined Contribution Pensions: Does It Influence Elderly Poverty?
by Natalia S. Orlova, Matthew S. Rutledge and April Yanyuan Wu
WP#2015-17
Abstract
The transition from defined benefit (DB) to defined contribution (DC) pension plans has left workers forced to make choices that may decrease their financial resources in retirement: taking lump-sum distributions before retirement that divert funds that could support consumption in retirement, not annuitizing DC benefits, or choosing a single-life annuity over a joint-and-survivor option so that their surviving spouses are left susceptible to income loss. This study examines pension coverage, lump-sum distributions, annuitization, and annuity life options among Health and Retirement Study households observed at ages 65-69 and 75-79 and relates these pension provisions to poverty incidence and the risk of falling into poverty at older ages. The results indicate that households with pensions that are annuitized with the joint-and-survivor life option and that do not take lump-sum distributions before age 55 are best able to avoid income and asset poverty. The results emphasize the importance of making DC plans operate more like DB plans, because the opportunities for these poor financial choices are likely only to grow given the reliance on DC plans as the sole source of employer pension income for future cohorts of retirees.
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1 comment:
Andrew, this is a dangerous comparison. Defined benefits are like insurance akin to Social Security. Defined contributions on the other hand are like 401Ks. One manages risk, and the other from taking risk. These aren't the same thing. It is like trying to judge Michael Phelps swimming ability by comparing how fast he swims to how fast Uriah Bolt runs.
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