Discuss Defined-Contribution (DC).
Discuss the impact of retirement planning on our mental health.
“The trouble with retirement is that you never get a day off” is a famous quote by Abe Lemons. According to Dolls et l. (2018), “Life expectancies steadily i ncrease and the average age of the population rises in most industrialized countries; This d evelopment has severe implications for (pay-as-you-go) pension systems, and there is concern that individual savings for retirement are not sufficient” (p.1). According to Sahlgren (2017), “In the post-World War II p eriod, the combination of increasing life expectancy, decreasing fertility rates, and the normalization of old-age retirement has induced lower overall labor force participation rates in developed countries” (p.1). “An important question then is how future pension entitlements can be increased in order to guarantee adequate old-age income for all individuals” (Dolls et l., 2018, p.1). According to Andreu et al. (2019), “Half of the near-retirees earning below the median income of $40,000 have no pension plan – they have neither retirement savings nor a DB pension, just 41 percent report having only a DC account or IRA, 4 percent only a DB pension, and 5 percent both” (p.2). Andreu et al. (2019) also stated that “Smaller shares of earners in the middle 40 percent and the top 10 percent (earning over $115,000 per year) lack any pension plan (20 and 15 percent respectively)” (Andreu et al. (2019, p.2). “Most workers earning above the median of $40,000 a year have only a DC account or IRA, while a smaller group reports having a DB pension as well” (Andreu et al. (2019, p.2). “More than half of w orkers earning below median income ($40,000) have no retirement savings; Median retirement savings for this income group is zero” (Andreu et al. (2019, p.2). “W orkers earning less than median income who own an IRA or DC plan, but with no DB entitlement, have a median account balance of $32,000, the middle 40 percent of earners have $100,000, and the top 10 percent have $230,000” (Andreu et al. (2019, p.2). “The median retirement savings of workers earning less than $40,000 with any retirement savings amount to about a year’s earnings” (Andreu et al. (2019, p.2). “The small minority of workers with both retirement savings and a DB pension has somewhat more retirement savings than workers with only DC savings, regardless of income level (DB participants are often unionized and paid more than similar workers)” (Andreu et al. (2019, p.2). “Workers with DB and DC accounts for the three income groups have a median DC and IRA account balance of $60,000, $150,000, and $315,000, and regardless of income level, workers with both a DB and DC plan are better positioned to maintain living standards in retirement, in part because they have larger account balances, but mainly because they can also look forward to income from their DB pension (the value of which is not calculated in this brief)” (Andreu et al. (2019, p.2). DC is a common retirement plan, and retirement plan has been very beneficial in our mental health.
DC is a common retirement plan. According to Morrissey (2018), “401(k) and similar plans are referred to as defined-contribution (DC) plans because employer contributions, rather than retirement benefits, are determined in advance, and employers incur no long-term liabilities” (p.2). According to Morrissey (2018), “Today, many Americans rely on savings in 401(k)-type accounts to supplement Social Security in retirement; This is a pronounced shift from a few decades ago when many retirees could count on predictable, constant streams of income from traditional pensions” (p.1). Morrissey (2018) also stated that “Participants in these plans are responsible for making investment decisions and shoulder investment and other risks” (p.2). “In contrast, in traditional defined benefit (DB) plans (pension plans, in layman’s terms), employers are responsible for funding promised benefits, making up the difference if the contributions are insufficient due to lower-than-expected investment returns, for example. 401(k)s are an accident of history” (Morrissey, 2018, p.2). “In 1980, a b enefits consultant working on revamping a bank’s cash bonus plan had the idea of adding an employer matching contribution and taking advantage of an obscure provision in the tax code passed two years earlier clarifying the tax treatment of deferred compensation” (Morrissey, 2018, p.2). “Thoug h 401(k)s took off in the early 1980s, Congress did not intend for them to replace traditional pensions as a primary retirement vehicle, and 401(k)s are poorly designed for this role” (Morrissey, 2018, p.20. “H owever, the line b etween employer-sponsored and individual plans is blurry because employers are not required to contribute anything to employee 401(k) accounts, because most funds in IRAs are rolled over from 401(k)s, and because employers do contribute to some types of IRAs” (Morrissey, 2018, p.2). “L ike defined-benefit plans, defined-contribution plans and IRAs receive preferential tax treatment intended to encourage employers to provide retirement benefits and help individuals to save for retirement” (Morrissey, 2018, p.2). “However, tax incentives for retirement savings are poorly targeted and ineffectual, as most of the subsidies go to high-income taxpayers who steer savings to tax-favored accounts rather than increase the amount they save” (Morrissey, 2018, p.2). Thus, DC is a common retirement plan where employer contributions, rather than retirement benefits, are determined in advance, and employers incur no long-term liabilities.
A retirement plan has been very beneficial in our mental health. “In the past decades, public policy has become more concerned with improving people’s well-being in general” (Sahlgren, 2017, p.1). “If retirement positively impacts mental health, attempts to increase the effective retirement age may thwart this policy goal while possibly also leading to higher sick-leave rates and rising health expenditures” (Sahlgren, 2017, p.1). “On the other hand, if retirement has negative effects on mental health, policymakers who seek to incentivize people to postpone retirement could, if they are successful, produce a virtuous circle in which public pensions systems are made sustainable, health expenditures decreased, and mental health among the population improved” (Sahlgren, 2017, p.1). “Previous research analyzing health effects of retirement yields mixed results, possibly reflecting both methodological choices and a general failure to distinguish between short- and longer-term effects; This study investigates the impact of retirement on mental health in Europe in both a short- and longer-term perspective” (Sahlgren, 2017, p.1). “Utilizing several waves of panel data from the Survey of Health, Ageing, and Retirement in Europe covering ten European countries, it exploits thresholds created by state pension ages in an individual-fixed effects instrumental-variable (FE-IV) set-up, borrowing intuitions from the regression-discontinuity design (RDD) literature, to deal with endogeneity in retirement behaviour” (Sahlgren, 2017, p.1). “The idea is that these thresholds create strong economic incentives to retire once crossed, but should not affect mental health in other ways once age effects are held constant in a flexible way” (Sahlgren, 2017, p.1). “Inducing people to postpone retirement is not only necessary to make pension systems sustainable, but can also be a way to improve mental health among the elderly” (Sahlgren, 2017, p.1). “While pension reforms may have immediate negative mental health effects prior to retirement as some research suggests – at least if these reforms postpone eligibility rules late in people’s lives – this paper indicates that they may pay a mental health dividend after some time by delaying the negative longer-term impact of retirement” (Sahlgren, 2017, p.1). Thus, retirement plan has been very beneficial in our mental health.
In conclusion, planning for retirement is essential for everyone as it offers financial security during old age. DC is a common retirement plan and retirement plan has been very beneficial in our mental health. DC is a common retirement plan where employer contributions, rather than retirement benefits, are determined in advance and employers incur no long-term liabilities. By learning about retirement, people can be able to start saving and planning for it in order for them to be able to financially take care of themselves during old age.
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Morrissey, M. (2016). The state of American retirement. Economic Policy Institute, Washington, DC.
Suari‐Andreu, E., Alessie, R., & Angelini, V. (2019). The retirement‐savings puzzle reviewed: The role of housing and bequests. Journal of Economic Surveys, 33(1), 195-225.