One of the advantages that public sector workers have over many private sectors workers are defined benefit retirement plans. Unlike defined contribution retirement plans, which specify how much money will go into a retirement plan, defined benefit plans identify the specific benefit that will be payable to employees at retirement.
One’s retirement benefit is generally supplied in the form of regular payments over the course of a lifetime beginning at what the plan defines as normal retirement age, typically sixty-five – this according to the National Endowment for Financial Education. The result is that defined benefit plan participants enjoy greater certainty regarding their retirement income. However, the share of compensation costs paid by state and local governments for defined benefit plans reached ten percent this past September. That’s the highest level on record and up from about six percent a decade ago.
In other words, governments need to contribute more money to shore up defined benefit plans, so their workers are receiving less current income. There are two primary factors at work. One is declining investment returns. The expected rate of return for pensions has declined according to the Center for Retirement Research. Moreover, during the financial crisis, many governments failed to pay the full amount required to keep pensions fully funded, which means that more must now come out of worker paychecks.