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CCH® BENEFITS — 08/30/12

Retirement Plan Shift From Defined Benefit To Defined Contribution Forced Older Workers To Continue Working

from Spencer’s Benefits Reports: The shift since the 1980s in private pension coverage from defined benefit (DB) to defined contribution (DC) retirement plans has contributed to the substantial rise in labor force participation of older Americans and the earlier take up rate of Social Security benefits, according to a recent study from the Center for Retirement Research at Boston College.

The study, Changes In Labor Force Participation Of Older Americans And Their Pension Structures: A Policy Perspective (No. CRR WP 2012-18), revealed that over the period from 1992 to 2007 the proportion of all men with private pension coverage that rely only on a DB plan dropped from 31 percent to 16 percent, and the share of men with only a DC plan rose from 47 percent to 63 percent.

For individuals ages 60 to 64, the substitution of a DB plan with a DC plan meant an increase in this population’s labor-force participation of 4.9 percentage points (1.7 points for ages 65 to 69). For men ages 60 to 64, this meant an increase in labor force participation from 54.4 percent in 1988 to 60 percent in 2010 and for men aged 65 and older, that rate rose to 22.8 percent in 2010, from 16.8 percent in 1994. For women, the labor participation rate increase was even higher from 33.2 percent in 1987 to 50.7 percent in 2011 for those ages 60 to 64, and it nearly doubled from 7.4 percent to 13.8 percent during the same time period for women age 65 and older.

The type of employer-sponsored pension matters for Social Security benefit take-up as well, the study determined. Individuals with a DC pension tend to claim Social Security benefits earlier than individuals with a DB pension. “This suggests that the shift from DB to DC pensions may have contributed to the documented rise in early Social Security benefit take-up” the study indicated.

“The timing of the exit from the labor force is closely tied to wealth accrual in DB plans, while wealth accrual in DC plans does not provide similar incentives for the timing of retirement,” the study noted. “DC pension holders are more concentrated at the earliest take-up age for Social Security old-age retirement benefits and are less responsive to changes in Social Security retirement age policy than DB pension holders.”

The study further concluded that “in light of the designated (gradual) increases in the FRA [Full Retirement Age] from currently age 66 to age 67 for beneficiaries born after 1954 that will result in a further 5 percentage point reduction in pension benefits when take-up occurs at ERA [Early Retirement Age]. Given that future generations of retirees will be even more dependent on DC pensions than current generations, our findings suggest that their Social Security benefit take-up and labor supply behavior may be less responsive than previous generations to the scheduled increases in the FRA to age 67 and further increases to the (full) retirement age currently debated.”

For more information, visit http://crr.bc.edu/.

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