Addressing Common Objections to Shifting from Defined-Benefit Pensions to Defined-Contribution Retirement Plans
by Lance Christensen, Truong Bui, Leonard Gilroy
June 17, 2014
State and local governments face difficult budgetary choices as government-sponsored and -maintained pension systems skyrocket beyond sustainable levels, endangering other budgetary priorities. While there are many different options for pension reform, the most effective long-term reform for dramatically reducing or eliminating unfunded pension liabilities is converting defined benefit plans (DB) to defined contribution plans (DC). This will minimize taxpayer risk and offers public workers the same type of retirement benefits that most private sector workers receive. The critical difference between DC and DB plans is that in a DB system, benefits are promised well before being paid out, and employers bear the risk of investment returns, whereas in a DC system employers are obligated to deposit money into employee accounts each pay period, and employees bear the risks. Reforms such as this will be necessary in order to keep pension funds solvent.