The difference between defined benefits and defined contributions plans is who the risk lies with in terms of the investments.
In both cases the employer agrees to make certain contributions to the employee. In a benefit plan, the risk of investment lies with the employer. They guarantee a certain pension for life, regardless of what the market or economy does. In a contribution plan (like a 401k), the company makes a contribution and the risk of investment performance lies in the hands of the employee. The employee can decide how much risk their portfolio should have. If the market and economy turn south, the performance effects the employee, but not the long term health of the employer.
This is why we have such vast amounts of unfunded liabilities for pension plans right now. Governments have promised lavish pensions which are now grossly underfunded because the idiots in government (both parties) assumed growth rates that were not sustainable. Not to mention the numerous rumors flying around that they weren't even funded properly to begin with.
In both cases, the money could come directly to the employee rather than as deferred comp, which would effectively raise the current salaries of both public and private workers. But then both would have to have the discipline to save/invest on their own for retirement (or risk living off SS alone).
Health care bene's are NOT deferred compensation. We are all being compensated for them today. The difference is in who pays for the health insurance. Right now, most private and public entities have guaranteed coverage plans. Meaning they deduct from your current salary a portion and the employer pays a portion. This varies by employer, but on average the private sector pays about 28% and public employees (especially unionized) pay little to none. This is where a major point of contention lies.... as if they are not paying anything out of current salaries (which are pretty much on par with the private sector) then that means the money is coming from tax payers (both public and private). In essence asking the private sector to pick up a larger portion of the tab.
WRONG...
When it comes to improving public understanding of tax policy, nothing has been more troubling than the deeply flawed coverage of the Wisconsin state employees' fight over collective bargaining.
Economic nonsense is being reported as fact in most of the news reports on the Wisconsin dispute, the product of a breakdown of skepticism among journalists multiplied by their lack of understanding of basic economic principles.
Gov. Scott Walker says he wants state workers covered by collective bargaining agreements to "contribute more" to their pension and health insurance plans.
Accepting Gov. Walker' s assertions as fact, and failing to check, created the impression that somehow the workers are getting something extra, a gift from taxpayers. They are not.
Out of every dollar that funds Wisconsin' s pension and health insurance plans for state workers, 100 cents comes from the state workers.
How can that be? Because the "contributions" consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services.
Thus, state workers are not being asked to simply "contribute more" to Wisconsin' s retirement system (or as the argument goes, "pay their fair share" of retirement costs as do employees in Wisconsin' s private sector who still have pensions and health insurance). They are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin.
The labor agreements show that the pension plan money is part of the total negotiated compensation. The key phrase, in those agreements I read (emphasis added), is: "The Employer shall contribute on behalf of the employee." This shows that this is just divvying up the total compensation package, so much for cash wages, so much for paid vacations, so much for retirement, etc.
The collective bargaining agreements for prosecutors, cops and scientists are all on-line.
Reporters should sit down, get a cup of coffee and read them. And then they could take what they learn, and what the state website says about fringe benefits, to Gov. Walker and challenge his assumptions.
And they should point out the very first words the state has posted at a web page on careers as a state employee (emphasis added):
The fringe benefits offered to State of Wisconsin employees are significant, and are a valuable part of an individual's compensation package.
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