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Working Paper

Changing the Retirement Paradigm

Robert L. Clark and Olivia S. Mitchell
WP2004-18

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Abstract

Labor market changes are driving employers, employees, and policymakers to confront the need for a new retirement paradigm. The old model assumed a relatively homogeneous labor force where employee benefits, particularly pensions, were designed to reward career employees after years of loyalty, effort, and productivity. When labor force growth was the norm, many firms favored hiring plentiful younger workers over retaining more costly older employees. It was in that context that employers developed defined benefit (DB) plans that benefited mainly full-career employees, while penalizing those who remained with the firm only a few years. Now labor force aging, combined with slower rates of workforce growth, suggest that jobs and pensions will have to be structured rather differently. This chapter overviews the factors driving the new model.