Benefits August 31, 2011

DB Plans Important in Achieving Retirement Income Adequacy

August 31, 2011 (PLANSPONSOR.com) - Baby Boomer and Generation X households that have a defined benefit (DB) pension plan accrual at retirement age are overall 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 new report by the nonpartisan Employee Benefit Research Institute (EBRI).
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The EBRI report finds having a DB pension plan is particularly valuable for those with the lowest income in both age groups, but also has a “strong impact” on reducing at-risk rates for those in the middle class: Among those in the second- and third-income groups combined (covering middle-income workers), the combined relative at-risk reduction is almost 20%. 

According to a press release, by age group, the greatest impact is on the Early Boomers: the percentage of households without any DB pension accruals considered to be at risk of insufficient retirement income is 67%, compared with only 41% for their counterparts with some DB accruals. For Late Boomers the at-risk percentage is 59% for those with no DB accruals versus 38% for those with some defined benefit accruals. The gap narrows even more for the Gen Xers: 55% for those with no defined benefit accruals versus 38% for those with some defined benefit accruals. 

By preretirement income level, the greatest DB advantage (as measured by the gap between the two at-risk percentages) is for the lowest-income quartile: the percentage of households without any DB pension accruals considered to be at risk of insufficient retirement income is 86%, compared with 68% for their counterparts with some defined benefit accruals. 

By age group and preretirement income level, the greatest DB advantage for each group (as measured by the gap between the two at-risk percentages) is for those in the lowest-income quartile. The absolute difference for the lowest-income quartile is 20 percentage points for Early Boomers and 20.7 percentage points for the Late Boomers. It decreases somewhat for Gen Xers but still decreases the at-risk rating for the lowest-income quartile in that cohort by 15.8 percentage points.
 
The EBRI analysis also quantifies how “at-risk” percentages are further reduced if a household member is eligible for a defined contribution retirement plan in addition to a DB pension plan. A key factor shown by the simulation analysis is how many future years of defined contribution plan eligibility a worker has before age 65. 

Full details are published in the August EBRI Notes, at http://www.ebri.org.

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