The Decline of Private-Sector Defined Benefit Promises and Annuity Payments: What Will It Mean?

July 2004, Vol. 25, No. 7
Paperback, 12 pp.
PDF, 159 kb
Employee Benefit Research Institute, 2004

Download Notes PDF pdf

Executive Summary

  • Congress enacted the Employee Retirement Income Security Act (ERISA) of 1974 to protect participants in defined benefit pension plans. Participants in such plans have greater financial security than they did prior to ERISA's existence. But the number of such plans has declined dramatically, and today they are outnumbered by more popular defined contribution plans, particularly 401(k) plans. This change raises a question of whether defined benefit plans could disappear entirely and has fueled a debate about what could be done to preserve such plans as a key element of America's retirement savings infrastructure.

  • This issue of EBRI Notes summarizes materials presented at a policy forum sponsored by EBRI May 6, 2004, on the implications of new research that projects the outcome if pensions virtually disappeared. Who would feel the greatest impact? How much would be lost? What would the impact be on retirement security, retirement policy and the nation's economy? Speakers focused on the value of defined benefit plans and the importance of taking action to reverse their current decline. Few saw much immediate hope of turning things around in the absence of strong policy initiatives to encourage this outcome.

  • New research by EBRI projects what would happen if the ongoing decline in pension coverage continued to its ultimate extreme. The research specifically models what would happen if:

    • All existing defined benefit plans were frozen.

    • All such plans were converted into cash balance plans.

    • All current cash balance plans were ended.

    • Retirees were required to take benefits as an annuity.

  • The first three scenarios would be disadvantageous to today's workers, but the extent of harm would depend on their year of birth as well as their economic and marital status. The fourth would be advantageous.

  • The trend in the private sector today is a preview of the stresses that will confront the Social Security system in the decades ahead.