Yes, I know that "defined benefit" is not a common household phrase. But most people know what a defined benefit pension is. It's when your employer promises to pay you a certain amount of money, pegged to your salary or according to some other formula, when you retire.
Some 30 years ago, most big employers had defined benefit pension plans. Some private-sector employees still have them, and many government employees do.
But a little-known provision of the 1978 tax law, section 401(k), authorized companies to offer defined contribution pensions. Instead of promising to pay workers specific amounts years later when they retire, companies would put certain amounts in the employees' 401(k) accounts.
The employees would own the money and choose among investment options. The money wouldn't be taxed until it was removed from the 401(k) accounts years later.
It's easy to understand why employers prefer defined contribution plans. Once they've paid the employees, they don't have any further obligation.
Many employees like them, too. They have actual money, not a claim on some fund someone else is managing. They can move from one job to another rather than stay with one employer for many years so their defined benefit pension will fully vest.
Pensions are not the only defined benefit system in our society. Social Security is a defined benefit system; you pay money in, and you get retirement benefits when you reach a certain age. Medicare is a defined benefit system, as well, though when you become eligible, you may be surprised to find it doesn't cover everything; that's why elderly people buy Medigap insurance policies.
Many on the political left decry the disappearance of defined benefit pension plans from the private sector and strive mightily to maintain them for public-sector employees. They argue that people with defined contribution plans often don't save enough for a comfortable retirement or make bad investment choices.
They argue that defined benefit plans and defined benefit public policies provide you with absolute 100 percent security and eliminate all risk. Unfortunately, it's becoming clear they don't.
The people who put defined benefit plans and policies in place assumed there always would be someone able to pay for them.
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