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November 12, 2020

Three Reasons Why Public Pensions are Cheaper Than Other Retirement Plans Like 401(K)S

Research has shown that Defined Benefit (DB) plans, or pensions, are cost-effective retirement plans that provide stable benefits. The National Institute on Retirement Security, for example, released a six-state study showing teachers and public employees were better off with a pension plan. You can view our summary of the study here or read the full study here

Yet, some still argue that closing current pension plans and implementing Defined Contribution (DC) plans, or 401(k) style plans, is cheaper. Tristan Fitzpatrick, writer for the National Public Pension Coalition (NPPC), details three reasons why this is not necessarily the case in this recent blog post

Closing a Defined Benefit plan can actually increase unfunded liabilities (or debt).

NIRS also examined states that closed their Defined Benefits plans in this study. Some state retirement systems that were well-funded before closing the plans dropped in funding levels and saw an increase in unfunded accrued liabilities or debt. 

Public pension plans are cheaper to administer than Defined Contribution plans.

Unlike Defined Contribution plans, Defined Benefit plans pool their risk together, providing enough assets to pay out benefits indefinitely for all of its members. 

Closing a defined-benefit plan can create higher public employee turnover, leading to increased training costs.

A recent study shows teachers and public employees highly favor their pensions and would consider leaving their jobs if their benefits were cut or diminished. High employee turnover is costly and can lead to increased training costs. 

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