CAMBRIDGE, MA. Through his office window in MIT's Alfred P. Sloan building, you can see the rise of Beacon Hill, the Charles River and its sailboats, and the salt and peppershaker stonework of the bridge that carries the "T" over the river and into Boston. The view, a central image in the movie "Good Will Hunting", may be the canonical view of Boston.

I've come to visit James M. Poterba, a startlingly young Professor of Economics here, because he has devoted much of his research career to studying the issues of saving and retirement. My goal is to learn what 'the big picture' looks like to a leading researcher. Listen:

"We are currently seeing a dramatic shift in how households prepare for retirement. While we still have the three-legged stool of Social Security, private pensions, and personal saving, all three are undergoing reform and change.

"In 1975 about three-quarters of all retirement plan money went into defined benefit plans where the employee is promised a lifetime income that is dependent on his income and work history. Those plans produced a guaranteed income in nominal dollars. Today, more than half the money is going into defined contribution plans. In these plans the retiree has the value of the account at retirement.

"That shift creates a host of issues. One is the shift of responsibility from the firm to the individual. Others are whether the employee should join the plan, how much should be contributed, how assets should be allocated, and how the money is to be withdrawn.

"This has produced concern that some people are facing much more risk (than they were facing under the previous system of defined benefit plans). I think that's a miss-apprehension."

When I asked him to explain he observed that the defined benefit pension system had risks that people often overlooked.

"An employee in a defined benefit plan, for instance, could change jobs." (This works to reduce lifetime benefits.)   In addition, the employer can change the plan."

Basically, Professor Poterba feels we have exchanged one set of risks for another. Today's defined contribution plan system is likely to grow into a very significant pool of assets for retirees.

How significant?

"If today's' retiree were to sell his Social Security benefits he'd get about $100,000. By comparison, the average 401(k) balance is only $10,000 over all retirees. But if we continue the growth of 401(k) plans out to 2025, Social Security will still be worth $100,000 while 401(k) plans will also be worth about $100,000.

"That suggests defined contribution plans will play a much more important role in the future."

When you consider that Social Security is the largest source of income for most retirees, "important role" is a major understatement.

You can see the change, by examining his research. Working with Steven F. Venti and David A. Wise, Professor Poterba used survey data to project the growth of 401(k) assets for each income decile. It was then compared to the "wealth" implied by a lifetime income from Social Security. Although lower income workers don't fare as well as higher income workers, 401(k) participants with a 50/50 bond/stock portfolio would, on average, accumulate $113,400 in assets at retirement age by 2025. Average Social Security wealth would be only $103,400. Projecting another ten years further, they found the average retiree would accumulate $151,000 in assets compared to $103,400 in Social Security wealth. (All figures were adjusted for purchasing power to 1992 dollars.

Projected Mean 401(k) Assets at Retirement Age by 2025
Figures reflect projected account balances based on survey data. Investments in 100 percent stock portfolios could produce larger assets while 100 percent bond investments could produce smaller assets. Bold type is used where the 401(k) assets exceeds Social Security Wealth.
Earnings Decile Social Security Wealth 50/50 Stocks/Bonds
First $   61,500 $     1,800
Second        74,100      10,200
Third        84,100      24,200
Fourth        93,400      45,500
Fifth    101,600      59,400
Sixth    108,100      81,200
Seventh    114,700    134,300
Eighth    125,100    177,800
Ninth    132,000    240,700
Tenth    143,400    357,800
All    103,400    113,400
Source: Poterba, Venti, and Wise, "Saver Behavior and 401(k) Retirement Wealth"

What does it all mean?

We've got a good engine for retirement--- but if you go beyond the averages, it needs some serious tuning for lower income workers.