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The Decline in DB Retirement Plans: Impact on Asset Flows and Market Dynamics

This study by James Poterba, Steven Venti, and David A. Wise explores the shift from DB to 401(k) retirement plans, analyzing demographic trends, asset flows, and market rates of return. It projects the decline of DB plans, compares DB and 401(k) assets, and assesses the impact on pension equities and market values up to 2040. Conclusions highlight the growth of 401(k) assets exceeding DB wealth and the evolving landscape of retirement savings. Despite increased withdrawals, the study indicates limited effects on market rates of return.

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The Decline in DB Retirement Plans: Impact on Asset Flows and Market Dynamics

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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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