Traditional defined benefit (DB) pension plans have long been an important source of income for elder households seeking to maintain a middle-class standard of living after a lifetime of work. Under traditional DB plans, retirees receive a guaranteed, regular stream of income after retirement that continues until death.
The monthly pension benefit is typically based on years of service to the employer, age, and salary history. Retirees also have the option to elect a joint-and-survivor benefit, to ensure that pension payments continue to a surviving spouse. DB plan participation rates among private sector American workers have sharply decreased from about 38 in 1980 to 20 percent in 2008. DB plan coverage in the public sector has not followed this same trend. Overwhelmingly, employees of local, state or federal government are covered by a traditional pension plan. For the same time period, the percentage of private sector workers covered by a defined contribution (DC) retirement plan, such as 401(k) plans, rose from 8 to 31 percent. Under such DC plans, employers and/or employees make contributions to a retirement savings account. Employees typically need to decide how to invest these sums in order to produce accumulated savings for income at retirement.
Recent turmoil in financial markets has substantially reduced the DC plan retirement savings of many workers and retirees alike. This has heightened public concerns that many older American households will not accumulate sufficient retirement savings to meet their needs in retirement. Although investment losses certainly have adversely affected the funding of many DB plans, the predictable monthly benefits of DB plans remain a source of security to retired households who have these plans.
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