Pennsylvania needs pension reform that provides state workers with a sustainable retirement system that’s fair to new workers, existing employees and taxpayers. What are our options? The current system is a defined benefit pension plan that guarantees a government income for life. Switching to a defined contribution plan would require the government to regularly deposit a guaranteed percentage of a worker’s salary into a personal retirement account, like a 401(k).
This is the fourth in a series of blog posts debunking the myths surrounding Pennsylvania’s pension crisis.
Myth: Defined benefit pension plans are better for taxpayers than defined contribution plans.
Fact: Defined benefit plans are inherently political. Defined benefit plans encourage lawmakers to increase benefits for current workers in good times, regardless of whether such benefits are affordable, and allow policymakers to push costs off onto future taxpayers in bad times. By contrast, defined contribution plans—which require a set contribution from employers and employees every month—make benefits predictable for taxpayers and workers.
Over time, defined benefit plans have proven to be unsustainable and unpredictable. This is why the private sector is rapidly abandoning such retirement systems. A survey by Towers Watson shows that Fortune 100 companies have overwhelmingly shifted to defined contribution plans.
These companies are also choosing 401(k)-type plans over “hybrid” plans. Hybrid plans, such as “cash balance plans,” are defined benefit plans that incorporate aspects of defined contribution plans. While they offer less risk than traditional pensions, they suffer from the same funding and political shortcomings which plague Pennsylvania’s existing plans.
Since 2002, the number of Fortune 100 companies offering hybrid plans has rapidly decreased, while those offering 401(k) plans only increased more than 300%.