length of service, and retirement age. Initially, defined benefits were mainly paid in the form of lifetime annuities (though more recently lump sums have in some circumstances been permitted). Capital market risk in DB plans is primarily borne by the plan sponsors, though the participants bear some of that risk if an employer files for bankruptcy and the plan is so underfunded that the reinsurer cannot guarantee full benefits. Today, employer plans in the corporate sector have mostly converted to defined contribution (DC) pensions (e.g., 401(k) or 403(b) plans). Participants must generally decide how much to contribute (sometimes with an employer match) and where to invest the funds, thus bearing capital market risk more directly. At retirement, the benefits are usually paid out as a lump sum rather than as a life-long benefit stream.

The changing nature of pensions has several implications. One is that, in DC plans, individuals may have difficulty determining whether their saving is adequate for their retirement needs. Another is that investment decisions have been shifted to participants who may be unable or unwilling to make informed investment choices. And in DC plans, most individuals are faced with the difficult decision of whether and how to annuitize their assets upon retirement, which traditionally was not the case in DB plans.

In the context of the macroeconomic impacts of aging, a key feature of the movement to DC plans has to do with different incentives to retire. While DB plans traditionally embedded strong incentives for people to retire early, there is no such encouragement in most DC plans. The increased prevalence of DC plans is perhaps the main reason for the increase in the labor force participation rate of older workers since the mid-1990s.

Changing Rates of Return

Some analysts have raised concerns that an aging population will reduce future rates of return or reduce the price of assets, a topic investigated in Chapter 8. The committee concludes that rates of return on investment are likely to have only modest effects on most retirees’ financial status because their asset holdings are small, though rates of return will influence savings adequacy for those with greater assets. There are a number of ways that population aging might affect asset returns and prices. Population aging will likely lead to higher U.S. wealth holdings per capita and per worker, which could drive down average returns on capital. Projections of global population aging suggest that these trends will be similar around the world. But population aging could also lead to increased government debt, which would tend to raise returns to capital. Globalization of financial markets implies that broader forces—particularly the overall macroeconomic environment, the business cycle, shifts in global savings and investment patterns, and the rise of high-savings countries such as China—are likely



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