401(K)’s or Pensions?

Which is better? Andrew Samwick, professor of economics at Dartmouth College answers it this way:

My colleague Jon Skinner and I made that comparison in an article in the American Economic Review.  The result was that the projected distributions of retirement income were surprisingly similar under the old-style DB plans that were dominant in the 1980s and the 401(k) plans that supplanted them in the 1990s, assuming workers were covered by the same plan over a long career.  (The comparison was better for 401(k) plans when workers switched jobs — vested deferred benefits under DB plans are often quite low.)

In truth, this should not really come as a surprise.  The amount of retirement income that will come from pensions is determined by workers’ willingness to give up current earnings for current pension contributions, regardless of whether they are making the contributions directly or the employer is (allegedly) contributing for them.  If 401(k) plans are proving to be inadequate, it is because we are a nation of inadequate savers, not because we had a great system of DB pensions that we no longer have.

Full article can be found here.

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