Final answer:
Retirement income can be from defined benefit plans with fixed payouts or defined contribution plans like 401(k)s with variable benefits depending on investment performance. This variable growth can combat the effects of inflation, providing better long-term financial stability for retirees.
Step-by-step explanation:
When addressing pension plans and their effects on income for retirees, it's essential to understand the difference between defined benefit and defined contribution plans. Defined benefit plans provide retirees with a fixed income, which can result in a loss of buying power due to inflation. On the contrary, defined contribution plans like 401(k)s and 403(b)s involve regular contributions from employers and potentially employees, which are then invested. These plans are portable and tax-deferred, allowing the investments made to potentially offset the effects of inflation, thereby protecting retirees' purchasing power over time.
The transition from defined benefits to defined contributions is significant because it correlates with a variable rate of growth, depending on investment performance, rather than a fixed rate. This switch implies that retirees could see variable benefits payable to them, contrasting with the defined benefits plans' fixed payments. Such flexibility can be beneficial during periods of inflation, as the income from investments may grow and better sustain retirees' living standards.