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.

1 Response to “401(K)’s or Pensions?”


  • Yeah, maybe we are inadequate savors. Take a look at the amount of savings by age. To me that’s pretty astonishing.

    http://www.bargaineering.com/articles/average-retirement-savings-by-age.html

    But there’s a reason people don’t save as much. Their wages are kind of flat, but their fixed expenses (mortgage, health care, child care, taxes, and auto) are up. So they have less cushion money. So they save less.

    Samwick says the concern about savings is overblown. I find that very surprising. I’m concerned that by the time you and I retire we’re going to see a pretty large glut of homeless or living with their kids elderly people. Samwick says a paper shows that’s not true. Let’s hope he’s right.

    Also as I’ve pointed out many times pensions out perform 401k’s by a substantial 1% APR. Sounds low, but if you modify your rate of return by 1% over a 40 year career you’re talking about hundreds of thousands of dollars.

    We encourage business to have a 401k. I think we may regret this. We may have been better off encouraging the pension more. If the 401k method leads to much larger elderly homelessness, that’s a societal cost.

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