Opinion Editorial | |
| Monday, November 9, 1998 | |
Defined Contribution Plans Offer Better Pensions |
For many workers over the postwar period a good job was virtually defined by its pension benefits. For the most part, this meant a defined benefit plan, epitomized by the old civil service retirement system of the federal government. Although benefits varied from company to company, in general a worker received some fixed percentage of his pay at retirement depending on how many years he worked for the company. In many cases, long vesting periods were required before pension benefits accrued, and benefits were often back-loaded in order to encourage workers to stay with the company for their entire careers. In 1978, however, businesses were given a new pension option: the 401(k) plan. Under this system, known as a defined contribution plan, workers were no longer given a fixed annuity at retirement. Rather, companies and workers put funds directly into a special account each year that the employee managed. At retirement, the worker could then withdraw the funds to provide income or invest the assets in an annuity that would pay him a regular income. Quite unexpectedly, 401(k) plans turned out to be wildly popular with workers. In part, this was due to changing patterns of employment. Rather than staying with one firm for their entire careers, many workers now expect to work for several different companies during their working lives. Defined contribution pension plans, which are more portable than defined benefit plans, are better adapted to this climate. And workers seem to like seeing a pot of money that belongs to them, while the equivalent annuity value of a defined benefit plan is largely invisible. Defined contribution plans were also better for employers because the regulatory and paperwork requirements are much less than for defined benefit plans.
Some critics, however, argue that defined benefit plans are still better for workers and provide higher benefits. But a new study by economists Andrew Samwick and Jonathan Skinner refutes this notion. They show that for an average worker defined contribution plans provide significantly larger benefits. Indeed, a worker contributing regularly to a 401(k) plan throughout his career can expect an annual retirement income of $24,068 compared to $11,273 for a worker in a defined benefit plan. Even workers that do not begin contributing until late in their careers will still do better on average in a defined contribution plan. Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, November 9, 1998. Home | Support Us | All Issues | Social Security Debate Central | Contact Us |
