March 10, 2009

Younger boomers face greater reduced income in shift to DC plans

Younger boomers face the greatest risk from an accelerated shift to defined contribution (DC) from defined benefit (DB) pension plans. While most older boomers will see modest changes in retirement income as a result of this shift, the decline in DB coverage will reduce retirement incomes for at least 10 percent of younger boomers.

These are the latest findings from the Center for Retirement Research at Boston College in a recent report titled "The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Boomers."

Between 1980 and 2008, the proportion of private wage and salary workers participating in only DC pension plans jumped from 8 percent to 31 percent, according to U.S. Bureau of Labor statistics. Experts predict most private sector DB plans will be frozen in the next few year and eventually terminated, according to the Center's report.

"Under the typical DB plan freeze, current participants will receive retirement benefits based on their accruals up to the date of the freeze, but will not accumulate any additional benefits, and new employees will not be covered. Instead, employers will either establish new DC plans or increase contributions to existing plans." the Center reports."These trends threaten to shake up the American retirement system as we know it because of vast differences between DB and DC pension plans, including differences in coverage rates within a firm, timing of accruals, investment and labor market risks, forms of payout, and effects on work incentives and labor mobility."

What does this mean for boomers and their retirement income? Using the Model of Income in the Near Term to simulate the effects of an accelerated shift from DB to DC pensions on boomers' incomes at age 67, the Center found that for older boomers (those born between 1946 and 1950), accelerated pension freezes produce virtually no change in DB or DC pension coverage and little change in income at age 67.

"While most boomers will experience relatively modest changes in income from the additional DB freezes, some boomers (particularly those in the last wave) will experience large losses and gains. The freezes will lower average incomes by at least 5 percent for 10 percent of last wave boomers, and raise average incomes by at least 5 percent for 3 percent of them."

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