Pension Plan Trends and Retirement

 The recent reversal of the trend toward early retirement is believed to be due, at least in part, to changes in retirement incentives within the Social Security program and to the elimination of mandatory retirement. Another factor may be changes in private pension plans. Over the past 20 years, defined-contribution plans such as 401(k) plans have become much more widespread. Unlike defined-benefit plans with fixed annual pension benefits, these plans do not have the built-in subsidies for early retirement.

Two studies using HRS data to assess the effect of the changing pension landscape have concluded that pension changes have indeed contributed to the reversal of the trend in early retirement. Friedberg and Webb (2003) argue that the spread of defined-contribution pension plans helps explain the increase in labor force participation among older workers, and further suggest that the median retirement age will continue to rise.

A second study looked at retirement expectations for HRS participants who were working in 1992 (Munnell et al. 2003). The expected retirement age for workers with defined-benefit pension plans was 63.9 years, compared with 65.2 years for workers with defined-contribution plans. The study authors identified two aspects of defined-benefit coverage that are responsible for this difference: pension plan characteristics and pension plan wealth. The characteristics of defined-benefit plans (e.g., early retirement incentives, lifelong benefits, and reduced investment risk) were estimated to move up a person’s expected retirement date by about 8 months, and the amount of wealth in the plan moved up the expected retirement age by an additional 6 months, on average (Table 2-4). In contrast, the characteristics of definedcontribution plans were estimated to move back the expected retirement date by about 2 months, while the amount of wealth in the plan moved up the expected retirement date by about 1 month.

The change in the types of pension plans adopted by employers may do more than influence
the timing of retirement, however. One study using HRS data found that people with
defined-benefit plans are more likely to be “very satisfied” with retirement, compared with those without such plans (Panis 2003). Moreover, retirement satisfaction among people without defined-benefit pensions tends to sour during the course of retirement, while the satisfaction among defined-benefit plan pensioners remains relatively constant (Table 2-5). People with defined-benefit plans also tend to develop depressive symptoms at a notably slower pace than those without such plans.


Retirement Satisfaction


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