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The Decline in DB Retirement Plans and Asset Flows

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

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The Decline in DB Retirement Plans and Asset Flows

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  1. 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

  2. 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

  3. 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

  4. Overview of method • Begin with SIPP cohort data--1984, 1987, 1993, 1995, 1998, 2003--on DB: • $ amount benefits • % receiving benefits • Participation rates (person) when working • Use estimated cohort effects to predict outside the range of the SIPP data (younger cohorts)

  5. Overview of method • Use cohort participation rates when working to help predict % of cohort receiving benefits when retired • Project total benefits paid by year for each cohort

  6. Estimate cohort effects

  7. 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)

  8. Total assets by year→2040 • Project assets assuming “full funding” • Discount future benefits at 3% real

  9. Pension assets, contributions, withdrawals →2040 • DB • 401(k) • Combined

  10. 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:

  11. 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.

  12. 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

  13. 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

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