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July 1994, Vol. 117, No. 7
Portability of pension benefits among jobs
Ann C. Foster
American workers hold numerous jobs over their working lives.1 These workers often receive lower retirement benefits from employer-sponsored retirement plans than do workers who remain with one employer because of the way such plans determine benefits.2 A "portable" pension, which ties a pension to a worker instead of a job, may provide an alternative solution to this pattern.
A worker's ability to maintain and transfer accumulated pension benefits when changing jobs is generally less of a problem in defined contribution plans than in defined benefit plans. An account is established in defined contribution plan for each participating employee. The employer and, in some cases, the employee, make fixed (or defined) contributions to the account. Benefits are not predetermined, but depend on contributed amounts and investment earning. With comparable contributions and rates of return, a worker who switches jobs (and leaves his or her funds in the plan of each organization) could have the same benefit amount upon retirement as a worker with an identical salary history who worked for only one employer.3
In contrast, defined benefit plans use predetermined formulas to calculate retirement benefits. Benefits generally are based on salary and years of service with the employer sponsoring the plan. If a "vested" employee leaves a job before retirement, the final salary at the time of leaving is used to determine retirement benefits. For the employee who stays at the same job until retirement, benefit calculations are based on pre-retirement salary levels, most often the highest salary. In addition, these high earnings are multiplied over more years of employment.
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1 Workers typically hold 10 or 11 jobs during their working lives. See Robert E. Hall, "The Importance of lifetime jobs in the U.S. economy," American Economic Review, September 1982, pp. 716-24.
2 See William J. Wiatrowski, "Factors affecting retirement income," Monthly Labor Review, March 1993, pp. 25-35; and Emily S. Andrews, "Pension Portability and What It Can Do for Retirement Income: A Simulation Approach," EBRI Issue Brief No. 65, April 1987.
3 If funds from former employers' plans were rolled over into an Individual Retirement Account, the job switcher would have a larger retirement benefit if the rate of return on IRA funds was greater than that of the employers' plans. Similarly, if the rate of return on IRA funds was lower, the job switcher would have a smaller retirement benefit than the worker with one employer. See Andrews, "Pension Portability."
Evolution of employer-provided defined benefit pensions. December 1991.
New survey data on pension benefits. August 1991.
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