The Shift from Defined Benefit Pensions to Personal Retirement Benefits is Likely to Benefit Retirees
By David A. Wise
David A. Wise is the Stambaugh Professor of Political Economy at the John F. Kennedy School of Government at Harvard University. He is also affiliated with the National Bureau of Economic Research and the Hoover Institution at Stanford University. He has written extensively about the saving effect of personal retirement programs and more recently has been evaluating the implications of the rapid spread of these programs. He is currently engaged in analysis of the retirement incentives in public social security programs around the world. In addition, he has been analyzing the incentive effects and features of employer-provided health insurance programs, the financial implications of housing wealth for the elderly, social security reform, and other economics of aging issues.
Since 1980, there has been a rapid shift from employerbased, defined benefit pensions to employee-controlled personal retirement accounts. This paper documents the shift and explores the conventional wisdom that this shift increases risk for retirees and will result in lower accumulation of retirement assets. In particular, it focuses on personal retirement accounts and considers the options available for retirees to contain risk and assess the likely outcomes over alternative options, including life cycle allocations. It concludes that personal retirement accounts are likely to lead to higher retirement accumulations that are also less risky than would be the case under defined benefit plans.
This paper is a written version of a talk with the same title that I presented in Chicago at the annual meeting of the National Association of Business Economics on September 27, 2005. The paper is based largely on joint work with James Poterba at MIT, Josh Rauh at the University of Chicago, and Steven Venti at Dartmouth College.
By David A. Wise