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This paper investigates the consequences of relying on assets accumulated in a defined contribution pension plan compared to an annuity based on salary from a defined benefit plan. Although a defined contribution plan varies with asset returns, it may be more desirable than a defined benefit plan when wage variability and job turnover are adequately considered. It is found that both job separation rates and wage variance increased in the 1990s. The new calibrations of these variables are used in a life-cycle model where a worker chooses between a defined benefit and a defined contribution plan. It is shown that the increase in job turnover made defined contribution the dominant pension plan.
(Online publication December 15 2008)
* I would like to thank Stephen P. Zeldes, Wojciech Kopczuk, Till von Wachter, Glenn Hubbard, Edmund Phelps, Benjamin Tarlow, Tony Webb, and seminar participants at Columbia University for very helpful comments and suggestions; Gordon Lester and Patricia Fisher for their assistance with SIPP; and Stephen Donahue and David McCarthy for their assistance with form 5500 filings. All errors are my own. E-mail: email@example.com