Monday, September 27, 2010

Public employee benefit plans need to be the same as everyone else's

The next time you hear the latest news on some government pension plan that is facing a multi-million dollar shortfall and threatening the benefits for those who are scheduled to retire, ask yourself this question: "Do I have a defined benefit plan where I work?"

Public employees and many unions have defined benefit plans, which give beneficiaries a set amount on retirement. It's a pretty cushy deal, really. The rest of have to make due with defined contribution plans, like 401Ks, which have a set contribution, but not a set benefit. This is what the vast majority of private businesses use. By definition they cannot have a shortfall, since the benefit is always based on whatever the value of the account is at retirement.

Other than mostly union plans, private companies began moving away from defined benefit plans many years ago, and no they have been superseded by defined contribution plans.

Employees love defined benefit plans, of course, since their benefits are a guaranteed amount. But the thing about it is that when a recession comes along, the actuarial calculations go out the window, and the amount in the plan is not enough meet the guaranteed benefits. So what happens? There are only two possibilities:
  1. Public employees don't get benefits they were guaranteed
  2. The government entity that guaranteed the benefits has to spend more public money making up the gap
Since employees have been guaranteed the money, 1. can't happen, which means that the rest of us who are on defined contribution plans have to belly up for it through our taxes. This is an absolutely absurd situation.

States like Kentucky need to pass laws forcing their executive branches to phase out defined benefit plans and institute the same kind of defined contribution plans everybody else is using.
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