Defined Benefit or Defined Contribution? A Study of Pension Choices

Defined Benefit or Defined Contribution? A Study of Pension Choices

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Article ID: iaor201112136
Volume: 78
Issue: 4
Start Page Number: 931
End Page Number: 960
Publication Date: Dec 2011
Journal: Journal of Risk and Insurance
Authors: ,
Keywords: insurance, pensions
Abstract:

We solve an empirically parameterized life‐cycle model of consumption and pension choices to show how expected earnings growth and risk affect the benefits of final‐salary defined benefit (DB) pension plans, relative to pension plans that are defined contribution (DC) in nature. We use micro data on the pension choices of individuals to provide evidence consistent with the model predictions: (1) individuals who expect a higher growth rate of earnings are more likely to choose DB final‐salary schemes, and (2) individuals who face a higher variance of persistent income shocks are less likely to choose DB final‐salary schemes. We control for cohort and age fixed effects in the empirical analysis.

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