The Decline in DB Retirement Plans and Asset Flows
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The Decline in DB Retirement Plans and Asset Flows
byJames Poterba--MIT and NBER
Steven Venti--Dartmouth and NBERDavid A. Wise--Harvard and NBER
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Demographic trends & markets–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
–“Companion” project on int’l capital flows and rates of return
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Figure 1-2. DB and 401(k) participation rates of employed persons, selected cohorts
0
5
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Age
Part
icip
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n R
ate
%
1984
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19911993
1995
19982003
C45C27
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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 demographically induced
change in pension equities vs. size of equity market
• Assumptions and uncertainty
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Overview of method
1. Begin with SIPP cohort data--1984, 1987, 1993, 1995, 1998, 2003--on DB:
1) $ amount benefits2) % receiving benefits3) 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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Estimate cohort effects
60 1 60 65 2 65 70 3 70 75 4
75 5
2013
1971
( )
ac a a a a
cc
B A A A AA
c A c
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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?• Compare demographically induced
change in equities with total market value• Suppose:
– The total value of equities will grow at a 4% real rate→2040
– DB plans fully funded & 60% in equities – 401(k) contributions 60% in equities & no
rebalancing• Then:
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So• The change in demand for pension
equities that can be attributed to demographic trends seems modest relative to the total equity market.
• Viewed another way: by 2040 pension plan net withdrawals would be 1% of total value of equity market (never much greater than 1%)
• Casts doubt on the prospect of a sharp meltdown in asset values.
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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 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
• By 2019, withdrawals from DB and 401(k) plans combined will exceed contributions
• But illustrative calculations suggest that the effect on market rates of return is unlikely to be large