Defined Benefit Pension Plan
Often referred to as a “DB” plan, this retirement plan has up until recently been the mainstay for pension plans in both the public and private sector. Here, employees contribute money from their paychecks every pay period. But what is specified (or “defined”) as the employee’s benefit is what the employer will pay out each year following the employee’s retirement. Therefore, the risk is being taken on by the governments. Projecting what governments will actually have to pay out is difficult, especially when retirees live for a long time.
For example, a government hires an employee who will earn a pension that will amount to 75 percent of his $80,000-a-year salary once fully vested. After 25 years, the pension vests and he retires to a $60,000-a-year pension. The pension will encourage the employee to stay with the government for most of his career, giving the government stability in personnel. But the government is taking on the investment risk – there is no guarantee that the money invested in the employee's pension over the course of his career will cover the annual $60,000 payout. But the government is still on the hook.
Join the Discussion
After you comment, click Post. You can enter an anonymous Display Name or connect to a social profile.
LATEST FINANCE HEADLINES
The Week in Public Finance: Traffic Cam Drama, Retiree Healthcare and Another D.C. Shoutout2 days ago
If Low Oil Prices Persist, North Dakota Could Lose Billions2 days ago
The 2014 Takeaways from State and Local Finance2 days ago
Vermont Drops Plan to Become First State with Single-Payer Health Care3 days ago
Washington Governor Proposes Cap-and-Trade System to Fund Transportation3 days ago
Even with Stock Market's Rise, Many Pensions Haven't Recovered from Recession4 days ago