1. The Decline in DB Retirement Plans and Asset Flows by James Poterba--MIT and NBER Steven Venti--Dartmouth and NBER David A. Wise--Harvard and NBER

2. 2 Project on demographic trends and effects on investments –Demographic trends, asset flows, and market rates of return Prior: the rise of 401(k) plans Now: the decline of DB plans –Demographic trends, housing demand and housing prices

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5. 5 Overview Summary of method Show PV of DB wealth at 65 →2040 –Compare with 401(k) assets at 65 Show projected total DB assets →2040 Show DB + 401(k) assets →2040 –Compare with value of market (equity)

6. 6 Overview of method 1.Begin with SIPP cohort data--1984, 1987, 1993, 1995, 1998, 2003--on DB: 1)$ amount benefits 2)% receiving benefits 3)Participation rates (person) when working 2.Use estimated cohort effects to predict outside the range of the SIPP data (younger cohorts)

7. 7 Overview of method 3.Use cohort participation rates when working to help predict % of cohort receiving benefits when retired 4.Project total benefits paid by year for each cohort

8. 8 PV of benefits at 65 for cohorts retiring→2040: DB v 401(k) All persons: –PV of DB benefits –401(k) assets Persons with plan: –PV of DB benefits for persons with a DB –401(k) assets of persons with a 401(k)

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11. 11 Total assets by year→2040 Project assets assuming “full funding” –Discount future benefits at 3% real

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14. 14 Pension assets, contributions, withdrawals →2040 DB 401(k) Combined

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20. 20 Effect on rates of return? Formal analysis to follow Some intuition for now –Compare projected equities in pension plans vs. total market –Assume the total value of equities will grow at a 4% real rate→2040 –Then by 2040 pension plan net withdrawals will be 0.5% of total value of equity market Future very uncertain

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22. 22 Conclusions-1 By 2012, 401(k) retirement assets at 65 will exceed the maximum prior level of DB wealth at 65 By 2030, 401(k) retirement assets a will be about 3 times the maximum of DB wealth Note: does not mean that all retirees will have sufficient retirement saving –Like DB plans, 401(k) plans are less common among low-wage earners

23. 23 Conclusions-2 By 2019, withdrawals from DB and 401(k) plans combined will exceed contributions Illustrative calculations suggest that the effect on market rates of return is unlikely to be large –More formal estimates will follow The next stage is to consider the effect of demographic change on housing prices