Pension plans

Date posted: January 25, 2011

Many states are facing problems with the public pensions. In some of those states there are recommendations to dramatically change how government workers are paid a pension. N.C. State University Extension economist Mike Walden outlines these discussions.

“Well … the traditional pension particularly for government is something called a defined benefit plan. This is where the government will promise to pay the retiree a certain amount while they are retired based on their salary, based on their years of work. Now while the individuals are working, they do contribute to the pension fund and the government or the entity will kick in. But the point is, you know exactly what you are going to get, and that is promised to you for as long as you live.

“Obviously what happens here is the government, or the company, bears the risk of what if they can’t come up with that money. And that is exactly what’s happened in many states — not fortunately in our state North Carolina but many states — the pension fund just can’t generate that promised amount of money.

“So an alternative is to go to something called a defined contribution plan. Here is where you as an employee contribute money, your employer contributes money that goes into an investment fund which the employee has some control over. And whatever that investment fund generates, whatever money it generates that’s what you are going to get when you retire. So nothing is guaranteed. It is all based on how much you put in and how much the investment fund has generated. So in this case the risk of not getting enough to live on now goes back to the employee rather than to the employer. And this again is what many states, again not North Carolina now, but many other states are considering going to.”

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