The Shift from Traditional Pensions to 401(k)s: Retirement Risks and the Timing of Retirement
By Rosemary Kaiser, Xiaohui sun & Yang Xuan
U.S. retirement plans have shifted sharply from defined benefit to defined contribution setups. How has this change affected retirement and savings behavior? We develop a quantitative life-cycle model where retirement plans differ in their exposure to longevity and investment risk. Holding the present-value cost of benefits fixed, these differences generate distinct savings and retirement incentives across plan types. The model replicates observed differences in savings and retirement behavior and implies that the shift from defined benefit to defined contribution plans alone accounts for roughly 92% of the decline in retirement by age 65 since the early 1990s. We then consider a policy that allows retirees to convert accumulated assets into actuarially fair annuities. Access to annuitization increases welfare and induces earlier retirement, with substantially larger effects in an economy that relies more heavily on defined contribution plans.
Source SSRN
