What do you think of the long-term trend of employers largely moving away from offering employees defined-benefit retirement plans to defined-contribution plans? 

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While it is sad for workers that employers are moving away from defined benefit pensions and towards defined contribution plans, it is understandable and probably necessary that they do so.

Defined benefit pensions are programs that guarantee a retiree a certain amount of money per month (or other unit of time).  The amount the employee gets is based on the salary they earned while working and the length of time that they worked with their employer.  This is a system that is very reassuring for workers because they know that they are guaranteed an income in their retirement.

By contrast, a defined contribution pension is not guaranteed in any way.  The employer promises to contribute an amount equal to a certain percentage of the worker’s salary to a pension fund for that worker.  At that point, the employer’s obligation ends.  The worker then has to make sure that the money is invested wisely and they have to take steps to make sure that the money from the plan (along with any other sources of retirement income they will have) will be sufficient for the years during which they are retired.  This system is much less reassuring as the employee has no guarantee of income during retirement.

As a worker, I would definitely want to have a defined benefit pension.  I would want the security of knowing that I would have an income for as long as I live.  Therefore, the movement towards defined contribution programs saddens me and makes me think that things are getting worse from a worker’s perspective.

However, I also understand that it would be very difficult for employers to keep offering defined benefit programs.  Today, people live much longer, increasing the cost of such programs for employers.  Perhaps more importantly, the business world is much more competitive now.  Firms cannot afford to make big promises about how much they will pay retired employees at some point down the road.  If they make such promises, it becomes very difficult for them to have financial flexibility decades down the road.  Companies that have huge liabilities in the form of defined benefit pensions that they have to pay are hamstrung because they cannot lower those costs.  We have seen this lead to situations where companies become very uncompetitive because of these “legacy costs.”  It seems to me that it is irresponsible for firms to make big promises to their workers when they will be unable to predict how much those promises will cost them and how much money they will have to pay the pensions when they come due.

The years after WWII were very good for American workers.  There was not that much global competition and people could expect steady work for high pay and great benefits.  In today’s more globalized and competitive environment, it is, sadly, much less possible for firms to offer great benefits like defined benefit pensions.  This is a sad change from the point of view of the worker, but it is probably necessary from the companies’ point of view.

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