Pension Type and Retirement Wealth

Throughout the 1980s and 1990s there has been a gradual shift from defined-benefit pensions, where an individual obtains a specified amount of retirement income, to defined-contribution pensions, where only the annual contribution by the employer is specified. In this article the author hypothesizes that defined-contribution plans have a greater probability than defined-benefit plans of leaving a retired person with inadequate expected retirement income. Wave 1 (1992) of the Health and Retirement Study is used for the data that is input into the author s retirement wealth equation where retirement wealth is positive and a function of job tenure, age, sex, race, investment portfolio, and whether or not the individual was born in the U.S. The analysis gives some support for defined-benefit pensions being more affective, however this is true only for those still working. At the same time, so long as there is a cautious mix of stocks and bonds, the data clearly indicates that defined-contribution plans are beneficial to retired individuals. Also recognized by this study is that those people with the highest educations collect the most retirement benefits, keeping earnings constant.