Defined Benefit versus Defined Contribution …

This PDF is a selection from an out-of-print volume from the National Bureauof Economic ResearchVolume Title: Pensions in the EconomyVolume Author/Editor: Zvi Bodie, John B. Shoven, and David A. Wise, Publisher: University of Chicago PressVolume ISBN: 0-226-06285-6 Volume URL: Date: 1988 Chapter Title: Defined Benefit versus Defined Contribution pension Plans:What are the Real Trade-offs?Chapter Author: Zvi Bodie, Alan J. Marcus, Robert C. MertonChapter URL: pages in book: (p. 139 - 162)5 Defined Benefit versus Defined Contribution pension Plans: What are the Real Trade-offs? Zvi Bodie, Alan J. Marcus, and Robert C. Merton Although employer pension programs vary in design, they are usually classified into two broad types: Defined Contribution and Defined ben- efit. These two categories are distinguished in the law under ERISA. Under a Defined Contribution (DC) plan each employee has an account into which the employer and, if it is a contributory plan, the employee make regular contributions .

143 Defined Benefit versus Defined Contribution Pension Plans of $1,500 per year (1 percent x 10 years x $15,000) beginning at age 65. With a nominal interest rate of 10% per year, the present value (PV) of this deferred annuity at age 35 is $654.The increase in pension benefits as a result of working an additional year can be broken into

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