The key advantage of a defined contribution plan is not that it is cheaper or somehow leaves employees worse off. Indeed, if the match is generous enough it may cost more and a city employee focused on saving could retire earlier than the current system.

Rather, the key advantage is that the COSTS of the plan are much more transparent (essentially a percentage of an employee’s salary) and occur, generally, at the same moment as other policy decisions. Decision makers, taxpayers, the public all can easily see what the consequences to retirement costs are, for example, of a pay raise or an expansion/contraction in the city’s workforce. No need for arcane actuarial calculations that take several months or even years to be made. No risks of getting the longevity assumptions wrong or a court case blowing your assumptions about final year compensation out of the water. Finally, and I believe this is very important, it is a much fairer system to workers who do not intended to make a career in the public sector but who wish to serve for a few years and then move (or return) to the private sector. Currently they get NO match (or at least one which they keep) from their employer.

Next post…my promised musings on the city’s cafeteria benefit plan … (or how NOT to create a benefit package).


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