TY - JOUR AU - Poterba,James AU - Rauh,Joshua AU - Venti,Steven AU - Wise,David TI - Defined Contribution Plans, Defined Benefit Plans, and the Accumulation of Retirement Wealth JF - National Bureau of Economic Research Working Paper Series VL - No. 12597 PY - 2006 Y2 - October 2006 UR - http://www.nber.org/papers/w12597 L1 - http://www.nber.org/papers/w12597.pdf N1 - Author contact info: James M. Poterba Department of Economics MIT, E52-350 50 Memorial Drive Cambridge, MA 02142-1347 Tel: 617/253-6673 Fax: 617/258-7804 E-Mail: poterba@nber.org Joshua Rauh Kellogg School of Management Northwestern University 2001 Sheridan Road Evanston, IL 60208 Tel: 847/491-4462 Fax: 847/491-5719 E-Mail: joshua-rauh@kellogg.northwestern.edu Steven F. Venti Department of Economics 6106 Rockefeller Center Dartmouth College Hanover, NH 03755 Tel: 603/646-2526 Fax: 603/646-2122 E-Mail: steven.f.venti@dartmouth.edu David A. Wise Harvard Kennedy School 79 John F. Kennedy Cambridge, MA 02138 E-Mail: dwise@nber.org M1 - published as James Poterba, Joshua Rauh, Steven Venti, David Wise. "Defined contribution plans, defined benefit plans, and the accumulation of retirement wealth," in Sören Blomquist and Roger Gordon, organizers, "Trans-Atlantic Public Economics Seminar (TAPES), Public Policy and Retirement" Journal of Public Economics, Volume 91, issue 10 (Elsevier Science Publishers) (2007) M3 - presented at "TAPES 2006", June 12-14, 2006 AB - The private pension structure in the United States, once dominated by defined benefit (DB) plans, is currently divided between defined contribution (DC) and DB plans. Wealth accumulation in DC plans depends on the participant's contribution behavior and on financial market returns, while accumulation in DB plans is sensitive to a participant's labor market experience and to plan parameters. This paper simulates the distribution of retirement wealth, as well as the average level of such wealth, under representative DB and DC plans. The analysis considers the role of asset returns, earnings histories, and retirement plan characteristics using data from the Health and Retirement Study (HRS). To simulate wealth in DC plans, individuals are randomly assigned a share of wages that they and their employer contribute to the plan. The analysis considers several possible asset allocation strategies, with asset returns drawn from the historical return distribution. The DB plan simulations draw earnings histories from the HRS, and randomly assign each individual a pension plan drawn from a sample of large private and public defined benefit plans. The simulations yield distributions of both DC and DB wealth at retirement as well as estimates of the certainty-equivalent wealth associated with representative DB and DC pension structures. The results suggest that average retirement wealth accruals under current DC plans exceed average accruals under private sector DB plans, although the heterogeneity in both types of plans implies many deviations from this rule. The comparison of current DC plans with more generous public sector DB plans is less definitive, because public sector DB plans are more generous on average than their private sector counterparts. The ranking of the expected value of retirement wealth accruals, and the certainty equivalent of those accruals, for these two classes of plans is sensitive to assumptions about the asset allocation rules of the DC plan participant. ER -