Researchers from the Center for
Retirement Research at Boston College note the shift from a defined
benefit (DB) employer-sponsored retirement plan landscape to a defined
contribution (DC) plan landscape and question whether this shift has
made households better or worse off.
Using data from the 1992,
1998, 2004, and 2010 waves of the Health and Retirement Study (HRS), a
nationally representative survey of older Americans, and a sample
including both single individuals ages 51 to 56 and couples in which at
least one spouse was 51 to 56, the researchers found DB wealth in all
years is higher than DC wealth. DB wealth is roughly constant over time,
while DC wealth nearly doubled between 1992 and 2010. “Combine these
patterns with the shift in coverage from DB to DC between 1992 and 2010,
and the result is relatively level retirement wealth over time,” the
researchers wrote in an Issue Brief.
However, they note that
stable aggregate retirement wealth does not necessarily imply that
households today are as well prepared for retirement as those in 1992.
“Preparedness depends on how retirement wealth is distributed, how much
income that wealth produces, and how that income relates to
pre-retirement wages,” the paper says. The research found that DC plan
wealth is skewed more toward those with more education and higher
earnings, with the top quartile holding 52% of total DC wealth in 2010
compared to 35% of DB wealth.
The researchers explain that the
yield on DB wealth in recent years has been higher than that on DC
wealth, because DC plan participants face two disadvantages when turning
wealth into income: while DB participants face actuarially fair
annuities, DC participants have to buy annuities on the open market
where marketing and other costs reduce annuity factors by about 15% to
20%; and the interest rate used to calculate commercial annuity rates
has declined sharply since 1992, while the interest rate assumption for
DB annuities is a steady 5.8%. NEXT: Lower retirement income as a percentage of wealth