DB to DC Shift Has Not Reduced Retirement Income

Some people contend that retirees fared better when most employer-sponsored retirement plans were defined benefit (DB) pensions, but a study suggests that is not true.

First, among retirees overall between 1975 and 2013, Social Security remained the primary source of retiree income in the United States. In 2013, Social Security benefits represented 57% of total retiree income, up slightly from 54% in 1975, and more than 85% of total income for retirees in the lowest 40% of the income distribution, according to the annual update of an Investment Company Institute (ICI) research study. Even for retirees in the highest income quintile, Social Security benefits represented one-third of income in 2013.

Secondly, the study, “A Look at Private-Sector Retirement Plan Income After ERISA, 2013,” found retirees across all income groups are collecting more in retirement income now from employer-sponsored retirement plans than they were in the mid-1970s. In 2013, 33% of retirees received private-sector retirement plan income—either directly or through a spouse—compared with 21% in 1975. The median income received by those with private-sector retirement plan income was approximately $6,600 in 2013, compared to about $4,900 in 1975 (in 2013 dollars).

“The share of retirees receiving private-sector pension income increased by more than 50% between 1975 and 1991 and has remained fairly steady since,” says Peter Brady, ICI senior economist and coauthor of the study report. “To date, the shift from defined benefit pensions to defined contribution pensions has not led to a decline in private-sector income. Since 1991, there has been a more than 40% increase in the median amount of inflation-adjusted income received by those with income from private-sector pensions.”

ICI explains that not all workers covered by DB pension plans would have received benefits from the plans, and the amounts received likely would be less than that implied by simple calculations assuming workers retire after a lengthy tenure with one employer. Private-sector workers change jobs frequently, ICI notes. In order to receive any benefits, workers must participate in a plan long enough to vest. But, vesting alone does not ensure benefits will be of great value: the accrual of benefits in a traditional DB plan is typically back-loaded, which means workers accumulate benefits slowly at first and then at a faster rate the longer they stay with the employer, which puts a premium on both having a long tenure at a single employer and separating from service close to the retirement age designated by the plan.

In addition, ICI says, the decline in private-sector DB pensions does not necessarily mean that private-sector DB pension income has become less prevalent among retirees. By itself, the decline in the share of private-sector workers covered by DB plans would have led to a decline in the share of retirees with DB pension income. However, over this same period, shorter vesting periods led to an increase in the share of DB plan participants who had vested benefits.

The study found access to employer-sponsored retirement plans has been fairly steady since 1979. While coverage has been consistent among private-sector workers, an increasing share of the private-sector workforce has access to an employer-sponsored defined contribution (DC) plan, and a decreasing share has worked for employers that sponsor DB plans. As a result overall coverage of private-sector workers by an employer sponsoring a retirement plan averaged 54% from 1979 (the first available data) to 2013.

The study report is here.