Defined Benefit Plans Prove Valuable for Reducing Retirement Income Risk

By on September 1, 2011 in Current Events, Retirement with 21 Comments

According to a new report from the Employee Benefit Research Institute (EBRI), Baby Boomer and Generation X households that have a defined benefit pension plan accrual at retirement age are nearly 12% less likely to run short of money for basic needs and healthcare costs. Households that have a 401k-style plan in addition to a defined benefit plan were even more unlikely to experience retirement income shortages.

In the federal sector, the Civil Service Retirement System (CSRS) is a defined benefit plan whereas the Federal Employees Retirement System (FERS) is similar to a 401k-style retirement plan that would be found in the private sector.

The EBRI report found that the plans prove particularly valuable for the lowest income level groups for supplementing retirement income, but they also have a significant impact on reducing risk for the middle class as well.

“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.

He noted that his research does not compare the relative effectiveness of defined benefit pension plans versus 401k-style plans in providing adequate retirement income; however VanDerhei said it does demonstrate the value of a defined benefit plan for those without future eligibility in a defined contribution plan. According to VanDerhei, “For those households without future years of defined contribution plan 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 analysis model made the assumption that all households retire when the oldest wage earner reaches age 65, and each household was split in terms of whether it retained a defined benefit pension accrual at age 65 to asses the impact of these benefits on retirement income. After running it for all Baby Boomer and Generation X households, it found that overall, the presence of a define benefit accrual at age 65 reduces the risk of inadequate retirement income by 11.6%.

The table below shows how having some defined benefit (DB) accruals reduce the percentage of risk of inadequate retirement income across age groups and income levels:

  No DB Some DB Accruals

Age Early Baby Boomers 67% 41% Late Baby Boomers 59% 38% Gen X 55% 38%

Income Lowest Income Quartile 86% 68%

© 2016 Ian Smith. All rights reserved. This article may not be reproduced without express written consent from Ian Smith.

About the Author

Ian Smith is one of the co-founders of FedSmith.com. He enjoys writing about current topics that affect the federal workforce. Ian also has a background in web development and does the technical work for the FedSmith.com web site and its sibling sites.

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