Discussion of
“The Decline of Defined Benefits Retirement Plans
and Asset Flows”
by J. Poterba , S. Venti and D. Wise
8th Annual Joint Conference of the Retirement
Research Consortium
Washington, DC, August 10, 2006
Annamaria Lusardi
Dartmouth College & NBER
Important questions
 What will happen to financial markets when
the Baby Boomers retire?
 In particular, what will happen to the stock
market?
Related question
 What will happen to the housing market?
 How is the composition of pension wealth
changing?
 Relative importance of DB and DC wealth now and in
the future (2040)
 In DC plans, workers decide how much to contribute
and how to invest pension assets.
Effect on financial markets
To answer this question, we need to
know how many assets will be sold on
the market
How much will Baby Boomers withdraw
from pensions?
 How much from DB?
 How much from DC?
A Future Financial Meltdown?
 The answer from this paper
seems no
The share of net withdrawals over
the total equity market is small
Answer depends on projections
and calculations.
Projections and calculations
Excellent use of micro-level data
20 years of SIPP data
Question:
How will DB participation and benefits look
like in the future in the population?
Younger cohorts look much different than
older cohorts in terms of DB plans.
Cohort, age, and time effects
With repeated cross-sections, we cannot
separately identify cohort, age, and time
effects
The authors estimate “cohort-time” effects
and “age-time” effects. Can they change in
the future?
How is the fit?
Figure 4-2. Actual versus fitted profiles for selected
cohorts (persons)
50
45
35
30
25
20
15
10
5
Age
63
61
59
57
55
53
51
49
47
45
43
41
39
37
35
33
31
29
27
0
25
Participation Rate %
40
Calculations and projections (cont.)
Calculations of DB wealth. Some
important assumptions:
Benefits of successive cohorts increase
3.9% annually
 generate upward slope
Discount rate: 3%
 Reasonable assumption but present value
calculations are very sensitive to discount rate
DB plans are funded
 Many may not be
Some important findings from this paper
Evidence of underfunding among DB
plans
Figure 7-4. Present value of DB liabilities vs DB
assets
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
20
12
20
15
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
millions of year 2000 dollars
7,000,000
Year
Flow of Funds assets
F5500+EBRI+Census assets
PV of future liabilities
Some important findings from this paper
Evidence of underfunding among DB
plans.
While the importance of DB wealth
should not be underplayed, assets in
DC plans are quickly taken over.
Figure 6-2. Present value DB benefits at age 65
and 401(k) assets at age 65, all persons
600,000
400,000
300,000
200,000
100,000
0
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
20
12
20
15
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
year 2000 dollars
500,000
Year cohort attains age 65
PV of DB benefits
401(k)assets
Figure 6-3. Present value of DB benefits at age 65 for
persons with a DB and 401(k) assets at age 65 for
persons with a 401(k)
600,000
400,000
300,000
200,000
100,000
0
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
20
12
20
15
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
year 2000 dollars
500,000
Year cohort attains age 65
PV of DB benefits
401(k)assets
Some final suggestions and comments
 Little discussion in the paper on the effect of
demographics and, particularly, the effect of the
Baby Boomers.
 According to the projections in this paper,
withdrawals will exceed contributions in 2019:
 The stock market may be affected
 Assuming a constant increase of 4% in the
stock market until 2040 may be questionable
 Looking at population hides differences among
demographic groups. Many workers do not have
pensions. DC pensions are less prevalent among
low income workers.