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Date: August 20, 2016 Last Edit: August 22, 2016

Related Content: News Economy Michigan

Should government employee pensions be converted to defined contribution plans?

Background

Currently, many government employee pension plans are
“defined benefit” plans that promise a guaranteed monthly benefit payment upon
retirement. The benefit amount is typically calculated from a formula that
considers length of employment, the last five years of annual salary, age plus
years of service, job position etc. Most defined benefit plans are paid for by
the government entity in question and do not require a contribution by the
employee. The cost and liabilities associated with a defined benefit pension
plan have caused them to become rare in the private sector in favor of “defined
contribution” plans, such as 401K plans, that require employees to contribute
to their own retirement plan – usually with an employer match up to a certain
amount. Some have proposed that government employee pension plans should follow
the private sector trend and be converted to the defined contribution model.

Proponents

Supporters of moving government employees from defined
benefit to defined contribution retirement plans say that taxpayers can no
longer afford to pay for Cadillac pension plans for government employees while
most private citizens are in defined contribution – 401K type plans. They point
to studies that claim that most of these plans are underfunded and in economic
distress because politicians from both parties continue to make pension
promises they cannot keep with taxpayer dollars. Supporters of ending defined
benefit pension plans for government employees argue that money that should be
going to fix roads and fund schools is instead being used to prop up these
unsustainable pension benefit plans.

Opponents

Opponents of ending defined benefit pension plans for
government employees claim that the reason for this kind of plan is because
government employees typically earn less than workers in similar private sector
jobs and these fringe benefits are necessary to attract qualified employees.
They say that the lower earnings of government employees would make it
difficult for them to contribute enough money to their own retirement to match
existing defined benefit plans. Opponents argue that efforts to end defined
benefit plans for government employees are just another assault on the middle
class by anti- worker groups that are pushing defined contribution plans, such as
401(k) plans, where the worker assumes all the risk.

Should government employee pensions be converted to defined contribution plans?

 

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