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Annamaria Lusardi Dartmouth College & NBER

Discussion of “The Decline of Defined Benefits Retirement Plans and Asset Flows” by J. Poterba , S. Venti and D. Wise. Annamaria Lusardi Dartmouth College & NBER. 8 th Annual Joint Conference of the Retirement Research Consortium Washington, DC, August 10, 2006. Important questions.

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Annamaria Lusardi Dartmouth College & NBER

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  1. Discussion of “The Decline of Defined Benefits Retirement Plans and Asset Flows”by J. Poterba , S. Venti and D. Wise Annamaria Lusardi Dartmouth College & NBER 8th Annual Joint Conference of the Retirement Research Consortium Washington, DC, August 10, 2006

  2. 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.

  3. 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?

  4. 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.

  5. 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.

  6. 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?

  7. How is the fit?

  8. 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

  9. Some important findings from this paper • Evidence of underfunding among DB plans

  10. 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.

  11. 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.

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