Defined benefit (DB) plans are still relevant even though defined contribution (DC) plans have become more common. In the latest DB Digest, Milliman’s David Benbow highlights a 1970 article by actuary Bill Halvorson that looks 30 years in to the future of DB plans. David also explains why the best possible retirement solution would combine DB and DC plans in addition to Social Security.
Here is an excerpt:
Reading this article from 1970 is like opening a time capsule. And, while Bill Halvorson didn’t predict everything that would happen to pensions, he did say a few things that ring very true nearly 50 years later.
Bill speculated that Social Security would spiral out of control and that if pensions integrated with Social Security, they would be diminished. This would lead to the emergence of savings plans, thrift plans, and profit-sharing plans as the only viable way to supplement expanding Social Security.
Bill also suggested that funding regulations would strangle private pensions…
DB plans are not dead. Not yet, anyway. And I, for one, hope that the pendulum will swing back toward the stability of some form of DB plan because as life expectancy increases, so does the likelihood of outliving your savings. The best solution is likely a combination of DB and DC plans in addition to Social Security. The DC balance could be designed to provide income for a fixed number of years, at which time the DB plan (or “longevity plan”) would kick in and provide lifetime income at later ages, while Social Security would provide inflation-adjusted lifetime income. Because DB benefits would be paid over shorter life expectancies, the funding would be much less volatile.