The Importance of Defined Benefit Plans for Retirement Income Adequacy

According to EBRI estimates, the percentage of private-sector workers participating in an employment-based defined benefit plan decreased from 38 percent in 1979 to 15 percent in 2008. Although much of this decrease took place by 1997, there have been a number of recent developments that have made defined benefit sponsors in the private sector re-examine the costs and benefits of providing retirement benefits through the form of a tax-qualified defined benefit plan. However, these plans still cover millions of U.S. workers and have long been valued as an integral component of retirement income adequacy for their households. In this paper, EBRI’s Retirement Security Projection Model (RSPM) is used to evaluate the importance of defined benefit plans for households, assuming they retire at age 65. The paper shows the tremendous importance of defined benefit plans in achieving retirement income adequacy for Baby Boomers and Gen Xers. Overall, the presence of a defined benefit accrual at age 65 reduces the “at-risk” percentage by 11.6 percentage points. The defined benefit plan advantage (as measured by the gap between the two at-risk percentages) is particularly valuable for the lowest-income quartile but also has a strong impact on the middle class (the reduction in the at-risk percentage for the second and third income quartiles combined is 9.7 percentage points). The analysis also provides additional information on how the relative value of the defined benefit accruals impact retirement income adequacy. It should be noted that this analysis does NOT attempt to do a comparison between the relative effectiveness of defined benefit vs. defined contribution plans in providing retirement income adequacy; however, it does show that when the value of a defined benefit plan is analyzed for those without any future eligibility in a defined contribution plan, the impact on the at-risk ratings increases to 23.6 percentage points. In other words, for those households without future years of defined contribution eligibility, the presence of a defined benefit accrual at age 65 is sufficient to save nearly 1 out of 4 of these households in the Baby Boom and Gen X cohorts from becoming “at risk” of running short of money in retirement for basic expenses and uninsured medical expenses. The PDF for the above title, published in the August 2011 issue of EBRI Notes, also contains the fulltext of another August 2011 EBRI Notes article abstracted on SSRN: “The Impact of Repealing PPACA on Savings Needed for Health Expenses for Persons Eligible for Medicare.”