Yueren Wang

DB versus DC: A comparison of total compensation

Employer-sponsored pension plans play an important role in providing employees with adequate retirement incomes. They are expensive and carry some important risks. The employer and its employees share these costs and risks differently depending on the plan design.  In this project, two designs are studied, a defined benefit (DB) plan and a defined contribution (DC) plan. They are analyzed in a simple common business setup under the same stochastic economic scenarios generated from a calibrated VAR model. The future contribution rates required to fund the DB plan will obviously be affected by changes in the economic environment. Here, the impact on future salaries is also taken into account.  The two types of plan are compared based on the total compensations, defined as the value of wages and retirement incomes, received by 25 cohorts of new employees. On an adjusted basis, we find that the two types of plan provide equivalent total compensations to their members.