Alternative Realities: The Impact of Extreme Changes in Defined Contribution Plans on Retirement Income Adequacy in America

Abstract

In recent years there have been a number of policy proposals that call into question the value of existing defined contribution plans. However, the suggested alternatives do not provide a detailed analysis of the impact of terminating defined contribution plans on retirement income adequacy for American households. Previous research by the Employee Benefit Research Institute (EBRI) has provided some tangential evidence with respect to the potential impact. In 2014 EBRI provided simulation analysis of the serious error introduced by models that ignored future contribution activity from defined contribution plans. In 2017 EBRI produced simulation results showing that, if there were no employer-sponsored retirement plans (defined benefit as well as defined contribution) and individuals were assumed to behave in the manner observed for those with no access to such plans, the aggregate retirement deficits would jump from $4.13 trillion to $7.05 trillion (an increase of 71 percent). In contrast, this Issue Brief provides a comprehensive exploration of the impact on retirement income adequacy for various cohorts of American households if defined contribution retirement plans were completely eliminated. As expected, the results are significantly greater for younger cohorts, since they would lose potential access to defined contribution plans for a longer period. The youngest age cohort (those currently ages 35–39) would suffer the most, with average retirement deficits increasing 23 percent from $49,182 to $60,253. Older cohorts would experience less of an impact: those ages 40–44 would have an increase of 18 percent, while those ages 45–49 would have a 13 percent increase. The average deficits for households above age 50 would increase but by less than 10 percent. The results are also analyzed by preretirement income quartile and breakouts into the following categories: single male, single female, widow, and widower. We find that elimination of defined contribution plans would have the most negative impact on single females. The Issue Brief then analyzes the opposite end of the defined contribution access spectrum by exploring the impact of a universal defined contribution scenario where every employer (with the exception of those that already sponsor a defined benefit plan) is assumed to sponsor a defined contribution plan. Again in this scenario, the youngest age cohort and single females would experience the largest change in retirement income adequacy. The youngest age cohort would benefit the most from this scenario, with average retirement deficits decreasing 24 percent from $49,182 to $37,506. Older cohorts would experience less of an impact: those ages 40–44 would have a decrease of 19 percent, while those ages 45–49 would have a 16 percent decrease and those ages 50–54 would have a 12 percent decrease. The average deficit for households above age 55 would decrease but by less than 10 percent.