Spotlight: Olivia S. Mitchell
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Individuals with access to defined-contribution plans assume all the risk, and businesses that offer defined-benefit plans assume all the risk. The Pension Protection Act passed a couple of years ago requires businesses to shore up their pension plans. Has this led to more frozen plans or conversions to cash-balance plans?

Changing face of aging

• Boomers working longer. • Soaring cost of prescription drugs. • College grads not retiring early. • Incentives encouraging work. • Pension Protection Act impact. • Shift to defined-contribution plans. • Reduced retirement spending. • Marriage and gender differences. • Wealth beyond housing. • Skipping long-term care insurance.

It's incorrect to assume that businesses offering defined-benefit plans assume all the risk, since surely the pilots and flight attendants of bankrupt airlines experienced a great deal of risk when their firms failed and their benefits were cut dramatically. Defined-benefit plans also rewarded only a few with a final pension -- the few who made it all the way to retirement age. A large number of employees who started with these employers never got a defined-benefit plan. Conversely, defined-contribution plans are safer for those with high turnover rates and in companies that face bankruptcy risk -- as long as there is not too much employer stock is in these plans.

The Pension Protection Act embodied provisions that strengthened funding for defined-benefit plans and also made defined-contribution plans more attractive. But I don't see it as having tilted the playing field either way.

What are the pros and cons of defined-contribution plans, such as 401(k) plans, from the viewpoint of the average American?

Defined-contribution plans work well for mobile employees who are sensible enough to put away their money and fortunate to get an employer match. Defined-contribution plans are now moving to "auto-enrollment," which is sensible for workers who might not appreciate the benefits of retirement saving. They are also offering life-cycle funds (also called age-based funds or retirement-date target funds), which are great for people who are not confident enough to select funds on their own. Defined-contribution plans are portable and allow one to move the money after leaving the job and defined-contribution plans don't encourage early retirement, which I see as a positive.

The HRS study suggests household spending across the board is reduced once people go into active retirement. Do you think this behavior is because people don't realistically anticipate their retirement consumption needs, and subsequently, are being forced to lower their standard of living?

The HRS shows that people anticipate they will spend less in retirement prior to making this transition, and then they follow through. So it is not much of a surprise for most people. The main explanation seems to be that people spend less eating out, buying work clothes and paying for transportation after they retire, so that the reduction in spending is probably sensible. And they also devote more time to comparison-shopping and "home production," meaning making their own food rather than eating in restaurants.