Indiana University SPEA Edward J. Bloustein School of Planning and Public Policy University of Pennsylvania AIR American University

Panel Paper: The Cost Effectiveness of Defined Benefit and Defined Contribution Retirement Plans

Thursday, November 12, 2015 : 8:50 AM
Johnson II (Hyatt Regency Miami)

*Names in bold indicate Presenter

Josh McGee, Manhattan Institute
The relative merits of Defined Benefit (DB) versus Defined Contribution (DC) retirement plans have been one of the most longstanding debates in retirement policy (Bodie et al 1988). This debate has occurred as the use of DC plans has increased significantly in the private sector, and they now cover the majority of private sector workers who receive a retirement plan through their employer. However, the vast majority, more than 90 percent, of public sector employees continue to earn retirement benefits under a DB system. The shift to DC in the private sector has been driven by a number of factors, and while some of these factors are unique to the private sector context, public sector plans have experienced their own set of challenges primarily related to plan funding. Since 2001, 49 out of 50 states have changed benefits substantially for at least some public workers. However, by and large changes to public sector plans have reduced final average salary DB benefit generosity, and have not resulted in comprehensive reforms analogous to the private sector shift to DC. That is not to say that governments have not considered moving toward a DC model, but when they have they have encountered significant pushback regarding the cost effectiveness and benefit security under the DC model. In this paper I investigate whether the primary claims about DB cost effectiveness and benefit security hold up to scrutiny. I provide new analysis of investment returns by plan type, the provision of annuities under DC plans, the cost of carrying pension debt under a DB plan, and the implication for workers.