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Employees with Pensions Face Far Less Retirement Risk
Middle-income workers' risk of outliving money drops almost 20 percent with a defined benefit plan

By SHRM Online staff  9/6/2011
 

Baby Boomer and Generation X households that have a defined benefit (DB) pension plan accrual at retirement age are almost 12 percentage points less likely to be at risk of running short of money for basic needs and uninsured health costs in retirement, according to a report by the not-for-profit Employee Benefit Research Institute (EBRI).

This is a message that employers who provide DB pensions to their employees may want to communicate to their workforce, to ensure that the value of this benefit isn't missed (and to help them incorporate their pension benefits into overall retirement planning).

Having a DB pension plan is particularly valuable for low-income employees but also had a “strong impact” on reducing at-risk rates for those in the middle class: Among those in the second- and third-income groups (covering middle-income workers), the combined relative at-risk reduction is almost 20 percent.

“The data show that defined benefit plans are tremendously important in achieving retirement income adequacy for Baby Boomers and Gen Xers,” said Jack VanDerhei, EBRI research director and author of the report, which was published in the August 2011 EBRI Notes.

“For those households without future years of defined contribution plan eligibility, the presence of a defined benefit accrual at age 65 was 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,” VanDerhei said.

The percentage of U.S. private-sector workers participating in an employment-based defined benefit pension plan decreased from 38 percent in 1979 to 15 percent in 2008 according to EBRI, but "these plans still cover millions of U.S. workers and have long been valued as an integral component of retirement income adequacy for those households that have one," VanDerhei noted.

Boomers Benefit Most

By age group, the greatest impact was on the Early Boomers: the percentage of households without any DB pension accruals considered to be at risk of insufficient retirement income was 67 percent vs. only 41 percent for their counterparts with some DB accruals. For Late Boomers, the “at risk” percentage is 59 percent for those with no DB accruals vs. 38 percent for those with some defined benefit accruals.

By pre-retirement income level, the greatest DB advantage was for the lowest-income quartile: the percentage of households without any DB pension accruals considered to be at risk of insufficient retirement income was 86 percent vs. 68 percent for their counterparts with some defined benefit accruals.

“At risk” percentages are further reduced if a household member is eligible for a 401(k) or other type of defined contribution retirement plan in addition to a DB pension plan. A key factor shown by the simulation analysis was how many future years of defined contribution plan eligibility a worker has before age 65.

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