Pension Plans and Retirement Insecurity


Why do we observe higher and higher retirement insecurity over the years? This paper argues that an individual’s retirement insecurity hinges on the interplay between her registered pension scheme and the level of market volatility. A pension scheme reflects the extent to which pension investment risk is individualized, providing the seed for retirement insecurity. The fear for retirement was triggered as capital markets became more volatile over the past decade. Market volatility creates an immediate information shortcut for individuals when forming expectations about post-retirement income that will only be realized in the long run. Due to the “available information bias,” citizens have developed overall downward expectations of retirement income under growing market volatility, forming pessimistic perceptions about retirement. This pessimism is more striking among those with a Defined Contribution pension scheme than those with a Defined Benefit plan because of the risk individualization feature. The argument is tested with data from the British Household Panel Survey (BHPS). The findings suggest that individuals’ perceptions of insecurity in post-working life are driven by the type of pension plan in which they are enrolled and the degree of market fluctuation facing them.

This is a preview of subscription content, log in to check access.

Fig. 1
Fig. 2
Fig. 3


  1. 1.

    The surveyed countries include South Korea, Mexico, Spain, France, China, Brazil, Nigeria, South Africa, Kenya, Pakistan, the United States, Indonesia, Germany, the United Kingdom, Israel, Argentina, Egypt, Turkey, Japan, Italy, and Russia.

  2. 2.

    For example, risk loving people might prefer a DC scheme due to the potential high yield; High income earners might be more open to a DC scheme because only a smaller portion of their asset would be invested; People identified with the Conservative Party might be more supportive of a DC scheme because such reform was passed under Margaret Thatcher.

  3. 3.

    It is not entirely clear what it means to be “economically insecure” if the question asked is “how economically insecure do you feel.” Insecurity can come from the risk of job loss, from sudden declines of wealth, or from the financial burdens of insufficient health insurance, to name just a few. When the question is loosely defined, responses are likely to conflate the different dimensions of insecurity (Dominitz and Manski 1996). Moreover, the dimensions of risk confronting an individual might be different depending on which stage an individual is at in her life cycle (Whelan and Maître 2008b).

  4. 4.

    In many widely used cross-national public opinion surveys, such as International Social Survey Programme (ISSP) or European Values Study (EVS), job insecurity questions are included regularly in the questionnaires. Existing research tends to agree that job insecurity is associated with stronger support for the welfare state, especially support for unemployment insurance. Studies agree that labor market conditions are what account for the level of job insecurity, though arguments differ as to what the changing conditions are.

  5. 5.

    Of note, the ideal replacement rate is the average income replacement rate suggested for the society. Depending on one’s economic circumstance, one may need higher/lower income replacement rate is one is at the lower/upper end of the income spectrum. In other words, if we were to plot the ideal income replacement rate for everyone in the society, it would be a distribution centering around the 70% replacement rate.

  6. 6.

    While the benefit is highly dependent on the fund management, the extra fees associated with the investment (such as the management fee) matter too. All the extra fees would also eat up the benefit under the DC plan.

  7. 7.

    Briefly speaking, a pension system is typically composed of three layers. The first is a state provided (flat rate or subsistent) pension. The second layer is an earnings-related pension. Unlike the first layer, the pension benefit received in an employment-related pension is linked, to some extent, to the previous earning. The third layer is an individual’s voluntary private pension insurance. This layer provides extra protection for those who want a more guaranteed postretirement living standard. States usually play incentive creating roles at this layer, encouraging people to add extra protection through providing tax exempt for private contribution.

  8. 8.

    For example, in the United Kingdom, which underwent pension privatization in 1986, the government highlights this sentence on their pension investment website: “in the long run, pension should grow more than saving accounts (”.

  9. 9.

    Relative to the size of the economy as measured by GDP, on average, pension funds have increased from 67.3% of GDP in 2001 to 77.0% in 2012 in OECD countries (OECD 2012, p. 2, 2013, p. 10).

  10. 10.

    In particular, in countries where the DC scheme is the only available plan that every eligible citizen is mandated to join, DC pension assets constitute 100% of the total pension assets. As of 2013, there are eight countries that only have a DC scheme as a mandatory plan: Chile, the Czech Republic, Estonia, France, Greece, Hungary, Poland and the Slovak Republic (OECD 2013, p. 28).

  11. 11.

    With respect to how the survey is sampled, BHPS selects a nationally representative sample of more than 5000 households, making a total of approximately 10,000 individual interviews. In the selected family, every individual older than 16 years old is interviewed. Once interviewed, the same individuals would be re-interviewed in successive waves until they split from the original family. To fully capture an individual’s life trajectory, for those who split from the original family and form a new family, all adult members in the new family would be interviewed.

  12. 12.

    SERPS was first introduced in 1978, and it was replaced by S2P in 2002/3 with a goal to expand social protection coverage to more economically disadvantaged people and people who cannot work due to disability or caring responsibility. In essence, S2P is the same as SERPS, providing pension related to earnings in working life as the second layer protection.

  13. 13.

    In reality, the provided scheme can be more complicated than merely a choice between the DB and the DC. In some scenarios, employers may provide a scheme that combines the features of both DB and DC plans.

  14. 14.

    40 years old seems to be agreed as roughly a cut point beyond which people start to worry about future retirement insecurity.

  15. 15.

    Besides 2001 and 2006, pension enrollment information was also collected on 2010 and 2012. However, data on 2010 and 2012 were damaged due to technical issues arising during the merging process, in which process BHPS was incorporated into a larger longitudinal study called Understanding Society (I confirmed the technical errors through email correspondence with data managers of the Understanding Society project, which BHPS was merged into. Those emails are available upon request.). The administrative error results in a mismatched sampling universe after the 2010 wave. Because of this error, we are left with only two waves of data (2001 and 2006) for our empirical analysis.

  16. 16.

    A selection bias problem happens when the correlation between the error term εi in the regression equation and the error term μi in the selection equation is nonzero. This violation can make the estimated coefficients biased and inconsistent. Treatment effect model accounts for this problem and generate consistent estimates. In the treatment effect model, the estimated ρ used to test whether Corr (εiμi) is zero or not. If H0 : ρ = 0 is rejected, there is a selection bias problem and treatment effect model is preferable. Otherwise, there is no concern for selection bias problem and this advanced model is not needed. In the analysis, the p value for testing H0 : ρ = 0 is 0.75, indicating that there is no selection bias.


  1. Ashcroft, J. (2009). Defined-Contribution (DC) arrangements in Anglo-Saxon countries, OECD Working Papers on Insurance and Private Pensions 35, OECD publishing.

  2. Baldwin, P. (1990). The politics of social solidarity: Class bases of the European welfare state 1875–1975. Oxford: Cambridge University Press.

    Google Scholar 

  3. Bender, K.A., & Jivan, N. (2005). What makes retirees happy? (Vol 28). Center for retirement research at Boston College.

  4. Berns, G.S., Laibson, D., & Loewenstein, G. (2007). Intertemporal choice –toward an integrative framework. Trends in Cognitive Sciences, 11(11), 482–488.

    Article  Google Scholar 

  5. Bewley, R., Ingram, N., Livera, V., & Thompson, S. (2007). Who’s afraid of the big bad bear? Or, why investing in equities for retirement is not scary and why investing without equities is scary. In H. Bateman (Ed.), Retirement Provision in Scary Market (pp. 14–44).

    Google Scholar 

  6. Brooks, S.M. (2009). Social protection and the market in Latin America: The transformation of social security institutions. New York: Cambridge University Press.

    Google Scholar 

  7. Brooks, C., & Manza, J. (2007). Why welfare states persist: The importance of public opinion in democracies. Chicago: University of Chicago Press.

    Google Scholar 

  8. Dominitz, J., & Manski, C. (1996). Perceptions of economic insecurity: Evidence from the Survey of Economic Expectation. Business Week, 1105, 1105–1196.

    Google Scholar 

  9. Dryzek, J., & Goodin, R. (1986). Risk-sharing and social justice: The motivational foundations of the post-war welfare state. British Journal of Political Science1, 16(01), 1–34.

    Article  Google Scholar 

  10. Elder, H.W., & Rudolph, P.M. (1999). Does retirement planning affect the level of retirement satisfaction? Financial Services Review, 8, 117–127.

    Article  Google Scholar 

  11. Esping-Anderson, G. (1990). The three worlds of welfare capitalism. Princeton: Princeton University Press.

    Google Scholar 

  12. Feldstein, M. (1998). Introduction. In M. Feldstein (Ed.), Privatizing Social Security. Chicago: University of Chicago Press.

    Google Scholar 

  13. Hacker, J., Rehm, P., & Schlesinger, M. (2010). Standing on shaky ground: American’s Experiences with Economic Insecurity.

  14. Hacker, J., Huber, J., Nichols, A., Rehm, P., & Craig, S. (2011). Economic insecurity and the great recession. (November).

  15. International Labor Organization (2004) Economic Security for a Better World.

  16. Jacobs, A. (2011). Governing for the long term. New York: Cambridge University Press.

    Google Scholar 

  17. Jacobs, A. M., & Matthews, J. S. (2012). Why do citizens discount the future? Public opinion and the timing of policy consequences. British Journal of Political Science, 42(04), 903–935.

    Article  Google Scholar 

  18. Jones, B. (1999). Bounded rationality. Annual Review of Political Science, 2, 297–321.

    Article  Google Scholar 

  19. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica: Journal of the Econometric Society, 47(March), 263–291.

    Article  Google Scholar 

  20. Kahneman, D., & Tversky, A. (1982). On the study of statistical intuitions. In D. Kahneman, P. Slovic, & A. Tversky (Eds.), Judgment under Uncertainty (pp. 493–508). New York: Cambridge University Press.

    Google Scholar 

  21. Pew Research Center (2014). Attitudes about aging: a global perspective. Retrieved from Accessed 18 Nov 2018.

  22. Macdonald, B.J., Osberg, L., Moore, K.D., Macdonald, B.-J., Osberg, L., & Moore, K.D. (2016). How accurately does 70% final employment earnings replacement measure retirement income (in)adequacy? Introducing the Living Standards Replacement Rate (LSRR). Astin Bulletin, 4620(3), 627–676.

    Article  Google Scholar 

  23. Marx, P. (2014). Labour market risks and political preferences: The case of temporary employment. European Journal of Political Research, 53(1), 136–159.

    Article  Google Scholar 

  24. Moene, K., & Wallerstein, M. (2001). Inequality, social insurance, and redistribution. American Political Science Review, 95(4), 859–874.

    Google Scholar 

  25. Morin, B.R., and Fry, R. (2012). Adults in their late 30s most concerned: More Americans worry about financing retirement.

  26. Munnell, A.H., Webb, A., & Delorme, L. (2006). A new national retirement risk index. Center for Retirement Research, 48, 1–9.

    Google Scholar 

  27. Organization for Economic Co-operation and Development (OECD) (2012). Pension markets in focus.

  28. Organization for Economic Co-operation and Development (OECD) (2008). Private pensions: OECD classification and glossary.

  29. Organization for Economic Co-operation and Development (OECD) (2013). Pension markets in focus.

  30. Organization for Economic Co-operation and Development (OECD) (2016). Pension markets in focus 2016.

  31. Osberg, L., & Sharpe, A. (2009). Measuring economic security in insecure times: New perspectives, new events, and the index of economic well-being. In Canadian Economics Association Annual Conference, Toronto, Canada.

  32. Pension Policy Institute (2012). A guide to the UK pensions system.

  33. Rehm, P. (2009). Risks and redistribution: An individual-level analysis. Comparative Political Studies, 2005, 855–881.

    Article  Google Scholar 

  34. Rudolph, H., Hinz, R., Antolin, P., & Yermo, J. (2010). Evaluating the financial performance of pension funds. In R. Heinz, R. Hinz, P. Antolin, & J. Yermo (Eds.), Evaluating the Financial Performance of Pension Funds (pp. 1–24). Washington DC: World Bank Publications.

  35. Samwick, A.A., & Skinner, J. (2003). How will 401(k) pension plans affect retirement income? American Economic Review, 94(1), 329–343.

    Article  Google Scholar 

  36. Scholz, J.K., & Seshadri, A. (2009). What replacement rates should households use? (No. WP 2009-214). Retrieved from Accessed 23 Oct 2017.

  37. Shiller, R. J. (1999). Human behavior and the efficiency of the financial system. Handbook of macroeconomics, 1, 1305–1340.

  38. Vanderhei, J. (2006). “Measuring retirement income adequacy: Calculating realistic income replacement rates.” EBRI Issue Brief no. 297. September 2006. Retrieved from Accessed 25 Oct 2017.

  39. Weyland, K. (2007). Bounded rationality and policy diffusion: Social sector reform in Latin America. New Jersey: Princeton University Press.

    Google Scholar 

  40. Whelan, C.T., & Maître, B. (2008a). Social class variation in risk: a comparative analysis of the dynamics of economic vulnerability. The British Journal of Sociology, 59(4), 637–659.

    Article  Google Scholar 

  41. Whelan, C.T., & Maître, B. (2008b). “New”and “old” social risks: Life cycle and social class perspectives on social exclusion in Ireland. Economic and Social Review, 39(2), 131–156.

    Google Scholar 

  42. Wilson Sokhey, S. (2017). The political economy of pension policy reversal in post-communist countries. Cambridge: Cambridge University Press.

    Google Scholar 

Download references

Author information



Corresponding author

Correspondence to Wei-Ting Yen.

Ethics declarations

Conflict of Interest

Wei-Ting Yen declares that she has no conflict of interest.

Informed Consent

Informed content was obtained from individual participants included in the study.

Ethical Treatment of Experimental Subjects (Animal and Human)

This article does not contain any studies with human participants or animals performed by the author.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Yen, W. Pension Plans and Retirement Insecurity. Ageing Int 43, 438–463 (2018).

Download citation


  • Old-age security
  • Market volatility
  • Welfare state
  • Public pension
  • United Kingdom
  • Economic insecurity
  • Retirement insecurity; BHPS