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Selected Abbreviations—continuedMINTPBGCPIMSSIPPSOISSASSIU.K.Modeling Income in the Near TermPension Benefit Guaranty CorporationPension Insurance Modeling SystemSurvey of Income and ProgramParticipationStatistics of IncomeSocial Security AdministrationSupplemental Security IncomeUnited KingdomThese trends threaten to shake up the Americanretirement system as we know it because of vast differencesbetween DB and DC pension plans, includingdifferences in coverage rates within a firm, timing ofaccruals, investment and labor market risks, formsof payout, and effects on work incentives and labormobility. DB pensions are tied to employers who,consequently, bear the responsibility for ensuringthat employees receive pension benefits. In contrast,DC retirement assets are owned by employees who,therefore, bear the responsibility for their own financialsecurity.This article simulates how the shift from DB to DCpensions might affect the distribution of retirementincome among boomers under two different pensionscenarios: one that maintains current DB pensions,and one that freezes all remaining DB plans in additionto a third of all state and local plans over thenext 5 years. The analysis uses the Social SecurityAdministration’s (SSA’s) Modeling Income in the NearTerm (MINT) microsimulation model to describe thepotential impact of the pension shift on boomers atage 67. The article examines both changes in retirementincome and the numbers of winners and losers,and it compares these outcomes among individualsgrouped by sex, educational attainment, marital status,race/ethnicity, years of paid employment, and quintilesof lifetime earnings and retirement income. Ofprincipal concern is whether income from increasedDC plan coverage will compensate for the loss of DBplan benefits.BackgroundThere are two general types of pensions: DC plansand traditional DB plans. In DC plans—which include401(k) plans—employers, employees, or both employersand employees make tax-deferred contributionsto a retirement account in the employee’s name. Thecontribution amount can be set either as a particularshare of salary or a given dollar amount. At retirement,workers receive the funds that have accumulatedin their accounts, generally as lump-sum distributions(Johnson, Burman, and Kobes 2004), although theycan also use the proceeds to purchase annuities in themarketplace.Traditional DB plans provide workers with guaranteedlifetime annuities that begin at retirementand promise benefits that are typically expressed asa multiple of years of service and earnings receivednear the end of one’s career (for example, 1 percent ofaverage salary received during the final 3 years on thejob, multiplied by the number of years of service). Planparticipants cannot collect benefits until reaching theplan’s retirement age, which varies among employers.Some plans allow workers to collect reduced benefitsat specified early retirement ages.The value of future retirement benefits from DCplans increases each year by the value of employeeand employer contributions to the plan plus any investmentreturns earned on the account balance. As longas market returns are relatively stable and participantsand their employers contribute consistently over time,account balances will increase steadily each year untilretirement. Because equity returns are volatile in thelong run as well as the short run (Stambaugh 2009),the expected income from DC retirement accounts ofthose reaching retirement age can vary greatly overdifferent time periods (Burtless 2009). But the plansthemselves are not designed to produce age-varyinggrowth rates. 1In contrast, the growth pattern of future benefits bydesign varies by age in DB plans. Pension wealth—the present discounted value of the stream of futureexpected benefits—grows slowly in typical DB plansfor young workers, increases rapidly once workersapproach the plan’s retirement age, but then levels offor can even decline at older ages. Pension wealth isminimal at younger ages because junior employeestypically earn low wages and have completed only afew years of service. In addition, if a worker terminatesemployment with the firm, benefits at retirementare based only on earnings to date, and their presentvalue is low because the worker receives them manyyears in the future. The present value of DB benefitsrises rapidly as workers increase tenure with theircurrent employer, as their earnings increase throughreal wage growth and inflation and as they approachthe time when they can collect benefits. Workers in2 Social Security Bulletin • Vol. 69 • No. 3 • 2009