Defined Benefits
Since the mid-1990s, legislation has been proposed to replace state and local defined benefit (DB) pension plans with defined contribution (DC) plans. The pace of these proposals increased from 2003 to 2006, partly because of the equity market downturn in 2000–2002 that increased contribution rates for many DB plans, both public and private.
Although the pace of DC proposals fell in 2007– 2008, they increased again as a result of the financial market downturn in 2008–2009. This paper discusses the top 10 advantages of maintaining DB pension plans. At issue is not whether state and local employees should have access to DC plans – many already do in conjunction with their DB plans or through supplemental DC-type plans, which play a useful role in providing additional tax-deferred retirement savings. Rather, the issue is whether DB plans should be eliminated and replaced with DC plans. While recognizing that DC plans are useful in providing supplemental retirement benefits, this paper argues against replacing DB plans with DC plans.
For many reasons, eliminating the DB plan and switching to a DC plan is likely to be a lose–lose situation for governments, their employees, and taxpayers, as will be discussed throughout this paper. However, although DB plans have many advantages over DC plans, it is also important to recognize the risks associated with DB plans and take steps to mitigate those risks.
