Retirement and the Evolution of Pension Structure

Workers with defined contribution plans are retiring significantly later, which helps explain why employment rates recently have risen among people in their 60s, after decades of decline.

The typical employer-provided pension plan has changed dramatically in the past twenty years. Defined benefit (DB) pension plans have become considerably less common since the early 1980s, while defined contribution (DC) plans have spread. The share of pensioned full-time employees with a 401(k) or other DC plan rose from 40 percent in 1983 to 79 percent in 1998. Those covered by a DB plan similarly declined from 87 percent to 44 percent over the same period.

In Retirement and the Evolution of Pension Structure (NBER Working Paper No. 9999), authors Leora Friedberg and Anthony Webb investigate how the decline in DB pension coverage influences retirement. They find substantial changes in retirement patterns as a result of the spread of 401(k) and other DC plans in place of DB plans. Workers with DC plans are retiring significantly later, which helps explain why employment rates recently have risen among people in their 60s, after decades of decline. Workers with DB plans retire two years earlier on average than workers with DC plans. The authors' simulation suggests that the continuing shift in pension structure will increase the median retirement age by about 10 months when comparing employees with pensions who will be aged 53-57 in 2015 versus those who were aged 53-57 in 1983.

These changes arise, the authors say, because of major differences in accrual of pension wealth. Pension wealth in DC plans accrues smoothly, while gains to pension wealth in traditional DB plans spike sharply at older ages, then turn negative afterwards, creating a financial incentive to retire at that point.

The authors use data from the Health and Retirement Study (HRS), a highly detailed longitudinal survey of over 7,600 households with a member born between 1931 and 1941. They find that people with different types of pensions generally share similar characteristics, except notably in their pension wealth. People with both types of plans have the highest pension wealth: a median of $345,156 if they retire at age 65. That figure is higher than the sum of the median stand-alone DB plan and the median stand-alone DC plan. In contrast, non-pension wealth is similar across pension type: median financial assets are in the range of $22,000-26,300. This similarity in wealth outside of pension plans reduces concerns that workers with different retirement preferences deliberately choose jobs with different pension plans; if this were the case and the authors had incorrectly attributed causality from the pension plans to retirement patterns, then workers would be expected to differ in their level of retirement saving as well. In many other dimensions as well, including education, occupation, and earnings, workers with different types of pensions are strikingly similar. It is also notable that industry, unionization, job tenure, and firm size do not significantly influence retirement, although they are related to pension type.

The results suggest that the trend toward later retirement will continue as younger workers, who increasingly have DC pensions, approach retirement.

-- Les Picker