Accrual Rate

The share of pensionable pay a defined-benefit plan credits for each year of service.

An accrual rate is the share of pensionable salary a defined-benefit pension credits for each year a worker remains in the plan.

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The core formula

In a simple final-salary defined benefit plan:

$$ \text{Annual pension at retirement} = (\text{years of service}) \times (\text{accrual rate}) \times (\text{pensionable salary}) $$

If the accrual rate is (1/60) and a worker completes 30 years, the worker earns (30/60 = 1/2) of pensionable salary as the annual pension before later adjustments.

What changes generosity

The accrual rate is only one lever. Total generosity also depends on:

  • whether pensionable salary is final salary or career average pay,
  • early or late retirement adjustments,
  • inflation indexation after retirement,
  • survivor benefits and other guarantees,
  • employee contributions.

Why economists care

Accrual rates affect retirement timing, deferred compensation, and the long-run liabilities of firms and governments. A higher rate helps recruit and retain workers, but it also raises the present value of pension promises.

Knowledge Check

### In a 1/60 plan, 30 years of service gives a worker an annual pension equal to: - [x] 1/2 of final salary - [ ] 1/60 of final salary - [ ] 30 times final salary - [ ] 60 times final salary > **Explanation:** Multiply years of service by the accrual fraction: \(30 \times 1/60 = 1/2\). ### Why do accrual rates matter economically? - [x] They affect retirement incentives and the funding burden of pension plans - [ ] They only matter for current-year tax payments - [ ] They determine stock market returns - [ ] They eliminate pension risk > **Explanation:** A richer pension formula changes worker behavior and increases the sponsor's long-run obligations. ### A lower accrual rate, holding everything else fixed, usually: - [x] lowers the annual pension earned per year of service - [ ] raises the pension automatically - [ ] turns a DB plan into a DC plan - [ ] removes the need for funding > **Explanation:** The accrual rate is the multiplier that converts service into annual retirement income.