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
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
2
3
4
Figure 1-2. DB and 401(k) participation rates of
employed persons, selected cohorts
50
45
1998
2003
35
1995
30
1993
1991
25
C27
20
C45
1987
15
1984
10
5
63
61
59
57
55
53
51
49
47
45
43
41
39
37
35
33
31
29
27
0
25
Participation Rate %
40
Age
5
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
6
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)
7
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
8
9
Estimate cohort effects
Bac   a60 A1   60 a65 A2   65a70 A3   70a75 A4 
 75 A5 
2013
 c A(c)
c 1971
c
10
11
12
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)
13
14
15
Total assets by year→2040
• Project assets assuming “full funding”
– Discount future benefits at 3% real
16
17
18
Pension assets, contributions,
withdrawals →2040
• DB
• 401(k)
• Combined
19
20
21
22
23
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:
24
25
26
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.
27
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
28
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
29