The Pension Factor 2012: Assessing the Role of Defined Benefit Plans in Reducing Elder Economic Hardships

Reference: National Institute on Retirement Security

July 2012

  1. By Dr. Frank Porell, Professor of Gerontology, University of Massachusetts-Boston and Diane Oakley, Executive Director, National Institute on Retirement Security

Recent turmoil in financial markets has substantially reduced the retirement savings of many workers and retirees alike. This heightened public concerns that many older American households will not accumulate sufficient retirement savings to meet their needs in retirement. Fortunately, about half the older American households count on income from a defined benefit (DB) pension.

The predictable monthly benefits provided by DB plans remain a source of security to these retired households enabling millions of Americans to remain secure and independent in old age. This study analyzes the contribution of DB pensions to the economic security of older American households.

The Pension Factor 2012 – an update of a similar study conducted in 2009 – finds that DB pension income continues to play a vital role in reducing the risk of poverty and material hardships among older Americans. Rates of poverty among older households without DB pension income were approximately nine times greater than the rates among older households with DB pension income in 2010, up from six times greater in 2006. Older households with DB pension income also were far less likely to experience food, shelter, and health care hardships. In addition, DB pension recipient households were less reliant on means-tested cash and non-cash public assistance.

While households with DB pension income generally fared better than households without pension income, DB pensions appear to have particularly improved the economic security of more vulnerable subcategories of elder households. Our analysis suggests that common gender and racial disparities in rates of poverty, material hardships, and dependence on public assistance are greatly diminished, and in some cases nearly eliminated, among households receiving DB pension income. Even after controlling for a range of socio-demographic factors such as education, race, gender, work history, we find that households with a pension fare better than those without. In other words, DB pensions appear to exert an independent, positive effect on older Americans’ economic well-being – an effect we call the “pension factor.”

The “pension factor” has helped substantial numbers of older American households avoid material hardships associated with inadequate food, shelter, and health care and to avoid having to rely on public assistance. More specifically, we estimate that in 2012, DB pension receipt among older American households was associated with:

  • 4.7 million fewer poor and near-poor households
  • 460,000 fewer households that experienced a food insecurity hardship
  • 500,000 fewer households that experienced a shelter hardship
  • 510,000 fewer households that experienced a health care hardship
  • 1.22 million fewer households receiving means-tested public assistance

Furthermore, not counting Medicaid reimbursements for acute and long-term medical care, we estimate that in 2010 governments spent about 7.9 billion dollars less on public assistance to older households because of their DB pension income. This represents about 6.4 percent of aggregate public assistance dollars received by all American households in 2010 from similar benefit programs. This amount is substantial, particularly in light of the increased demand placed on the resources of government safety net programs throughout the country in recent years.

More broadly, the study also finds:

  • A continued decrease in rates of DB pension income receipt likely related to more than three decades of declining DB plan participation rates among active employees.
  • Increasing fractions of older American workers will be entering retirement without the security of a DB pension in the future.
  • Older households with DB pension income generally fared better during the recent economic turmoil relative to household without such income.
  • Income from pensions may be especially important to middle income American households.
  • Lower rates of DB pension receipt are found among older persons living in the West and South relative to other regions.
  • Pensions have helped many minority and female-headed households escape poverty.

To read study in full, please click here.

For a summary on the study’s findings, please click here.

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