Will Unions Promote Defined Contribution Plans the Way They Promote Pensions?

The virtue of a defined contribution plan is that once the employer has made their contribution, the employer’s obligation is fulfilled. The employee’s retirement benefit is based on a “defined” contribution – typically some fixed percentage of their base pay – that money is invested, and the retiree lives on the accumulated savings and interest. Often, with the same amount invested, these plans can offer participants a more lucrative retirement than a pension.

Given the potential of defined contribution plans to sometimes outperform pensions, why are public employee unions seemingly focused almost exclusively on the alternative, the so-called “defined benefit” pension? Far more common in the public sector, these defined benefit plans offer the retiree a guaranteed “defined” amount in the form of fixed payments for as long as they live, usually adjusted upwards each year for inflation. What the employer has to contribute to the fund is undefined and fluctuates as needed to maintain those promised payments.

The problem, however, with defined benefits is they were sold as costing taxpayers very little, when in fact the employer contributions over the past twenty years have soared. To say those undefined employer payments to the pension funds have “fluctuated,” in order to keep those defined benefits flowing, is to indulge in the understatement of the century.

Back in 1999, during the internet bubble, when California’s public employers consented to an increase to the value of their promised defined benefits of well over 50 percent, the pension funds claimed it wouldn’t cost […] Read More