The Decline in DB Retirement
Plans and Asset Flows
by
James Poterba--MIT and NBER
Steven Venti--Dartmouth and NBER
David A. Wise--Harvard and NBER
Project on demographic trends
and effects on investments
–Demographic trends, asset flows,
and market rates of return
• Prior: the rise of 401(k) plans
• Now: the decline of DB plans
–Demographic trends, housing
demand and housing prices
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Overview
• Summary of method
• Show PV of DB wealth at 65 →2040
– Compare with 401(k) assets at 65
• Show projected total DB assets →2040
• Show DB + 401(k) assets →2040
– Compare with value of market (equity)
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Overview of method
1. Begin with SIPP cohort data--1984,
1987, 1993, 1995, 1998, 2003--on DB:
1) $ amount benefits
2) % receiving benefits
3) Participation rates (person) when working
2. Use estimated cohort effects to predict
outside the range of the SIPP data
(younger cohorts)
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Overview of method
3. Use cohort participation rates when
working to help predict % of cohort
receiving benefits when retired
4. Project total benefits paid by year for
each cohort
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PV of benefits at 65 for cohorts
retiring→2040: DB v 401(k)
• All persons:
– PV of DB benefits
– 401(k) assets
• Persons with plan:
– PV of DB benefits for persons with a DB
– 401(k) assets of persons with a 401(k)
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Total assets by year→2040
• Project assets assuming “full funding”
– Discount future benefits at 3% real
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Pension assets, contributions,
withdrawals →2040
• DB
• 401(k)
• Combined
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Effect on rates of return?
• Formal analysis to follow
• Some intuition for now
– Compare projected equities in pension plans
vs. total market
– Assume the total value of equities will grow at
a 4% real rate→2040
– Then by 2040 pension plan net withdrawals
will be 0.5% of total value of equity market
• Future very uncertain
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Conclusions-1
• By 2012, 401(k) retirement assets at 65
will exceed the maximum prior level of DB
wealth at 65
• By 2030, 401(k) retirement assets a will be
about 3 times the maximum of DB wealth
• Note: does not mean that all retirees will
have sufficient retirement saving
– Like DB plans, 401(k) plans are less common
among low-wage earners
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Conclusions-2
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By 2019, withdrawals from DB and
401(k) plans combined will exceed
contributions
Illustrative calculations suggest that the
effect on market rates of return is unlikely
to be large
– More formal estimates will follow
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The next stage is to consider the effect of
demographic change on housing prices
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