Question

Financial crises and recession is likely to have an effect on the retirement decision of older workers.
(a) Based on your knowledge of the determinants of the retirement decision, discuss how the financial crises and recession may affect retirement decisions.
(b) Discuss how this effect of the financial crises and recession on the retirement decision may differ for workers in defined-benefit pension plans compared to defined-contribution plans, after explaining the differences between the two types of plans.

Answer 1

1. While unemployment increased sharply during the recession, many Baby Boomers were able to stay on the job, softening the overall numbers. The overall age of the workforce did increase during and just after the recession. The number of Americans 65 and older still working increased by 3% between 2010 and 2013, while the number of workers aged 18 to 29 decreased by 2%, according to Gallup.

The reason for the uptick in older workers was likely due to seniors who stayed in the workforce or re-entered it to rebuild their retirement savings. Other factors included the need to support younger family members who had lost jobs or homes.

Seniors close to retirement age at the end of the recession who elected to remain in the workforce did so for an additional four years on average. The percentage of wealth lost during the recession did not appear to be a factor. Older workers had been staying in the workforce longer for several years before the recession.

2. Defined Contribution Plans

Defined contribution plans are funded primarily by the employee, called the participant, with the employer matching contributions to a certain amount. The most common type of defined contribution plan, which many people are familiar with, is a 401(k) plan. A participant may elect to defer a portion of his gross salary via a pretax payroll deduction to the plan, and the company matches according to its summary plan description, or SPD.

Defined Benefit Plans

Employers guarantee a specific retirement benefit amount for each participant of a defined benefit plan, which can be based on the employee's salary, years of service or a number of other factors. Employees have little control over the funds until they are received in retirement. The employer bears the investment risk of ensuring the defined benefit amount is able to be paid to the retired employee.

In defined Conribution Plan, the employee must direct contributions and investments to grow the assets adequate for retirement. While in the other, defined benefit plans require complex actuarial projections and insurance for guarantees, making the costs of administration very high.