Defined benefit or defined contribution?: An empirical study of pension choices

Cocco, Joao F. and Lopes, Paula (2004) Defined benefit or defined contribution?: An empirical study of pension choices. Financial Markets Group Discussion Papers (505). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We empirically study individual pension choice between two different defined benefit (DB) plans and a defined contribution (DC) plan. The DB plans differ in their contribution rates and in the way retirement benefits are calculated, as a proportion of final salary or as a proportion of lifetime earnings. We relate labor income characteristics to the choice of pension plan. Among other determinants of pension choice, we find that: (i) individuals who face higher income growth are more likely to choose DB final salary plans, and less likely to choose the DC plan; (ii) individuals who face higher earnings volatility are less likely to choose DB final salary plans; (iii) individuals with higher earnings are more likely to choose either the DC or the DB final salary plan. These results constitute evidence of self selection of individuals into different pension plans, an important issue for pension fund providers and for those involved in pension reform.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2004 The Authors
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
JEL classification:	G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions H - Public Economics > H5 - National Government Expenditures and Related Policies > H55 - Social Security and Public Pensions J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J32 - Nonwage Labor Costs and Benefits; Private Pensions
Date Deposited:	06 Aug 2009 10:35
Last Modified:	15 Sep 2023 22:58
URI:	http://eprints.lse.ac.uk/id/eprint/24751

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