CASE STUDY OF BEHAVIOR DIFFERENCES BETWEEN DEFINED BENEFIT AND DEFINED CONTRIBUTION PENSION PLANS

Open Access
Author:
Huang, Ying-Hui
Area of Honors:
Mathematics
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Dave Cather, Thesis Supervisor
  • David Arthur Cather, Thesis Supervisor
  • Diane Marie Henderson, Honors Advisor
Keywords:
  • defined benefit
  • defined contribution
  • pension
  • retirement rate
  • withdrawal rate
Abstract:
This study compares and contrasts the retirement and withdrawal behaviors of the two federal retirement systems: the Civil Service Retirement System (CSRS) and the Federal Employee Retirement System (FERS). CSRS is a defined benefit pension plan that was established in 1920s. FERS was later established to replace CSRS in the 1980s due to the implementation of the Social Security Amendment of 1983. In order to align with the newly established law, FERS was required included defined a contribution plan and Social Security benefits on top of a defined benefit plan. As a result, the two systems used different funding methods, and thus have different retirement and withdrawal behaviors. This study uses the data provided by the Society of Actuaries to examine the retirement and withdrawal rates of the two systems using two variables: age and years of service. Results show that CSRS behaves similar to a defined benefit plan; higher retirement rates occur at normal retirement ages and at years of service where normal retirement requirements are met. Results also suggest that FERS behaves similar to a defined contribution plan with one exception; when retirement rates of FERS are examined with variable age, it behaves similar to a defined benefit plan due to the incentive induced by the Social Security benefits.