Defined pension plans: benefit vs. contribution
I was just watching the Council meeting on Channel 14 and want to clarify a statement that was made that was, IMO, misleading (though definitely unintentional).
At Tuesday’s meeting, at least one Council member suggested that a defined benefit plan (DB) made more sense than a defined contribution plan (DC) for the fire department.
Why?
It was stated that DCs don't act as incentives because unlike employees, volunteers cannot benefit from a "matching contribution" as they do not get paid.
But “matching contributions” are largely irrelevant to the discussion of DBs v DCs.
Why?
There’s no difference in funding for the two plans… the only difference is… who takes the risk. The recipient or the taxpayer? For me, I’d prefer to take the risk off the taxpayer… and give the risk (upside or downside) to the recipient.
Here’s an example of how the two plans would work:
Anyway… I didn’t understand why I heard this statement because twice in the past two years, this assertion was made by town staff during budget committee meetings. And both times I challenged the validity of the assertion, yet only a few weeks ago… this same assertion seemed to be made again in the Herald… that a DC isn’t appropriate for the FD because of their inability to take advantage of a matching contribution.
Regardless of the statements that have been made, I hope that all Council members will think more about the taxpayers and begin to ask more probing questions of staff on financial issues. I mean, understanding the difference between DBs and DCs may seem insignificant to some... but why would Council members openly oppose the drafting of a cost/benefit analysis for our ballooning rainy day fund?
I can't help but wonder if the Council's basic oversight function is being performed as well as it should be.
Tim White
Town Council, Budget Committee
5 comments:
The simple reason there is a lack of questioning, is because there is a lack of understanding and no desire to admit they do not know.
There’s no difference in funding for the two plans… the only difference is… who takes the risk
The difference is, the town has historically never made contributions to DB plans, hoping that the fund performs well enough to never have to contribute. Then, when they are forced to contribute they blame the plan for the liability to the town.
As always, the town is penny wise and pound foolish. By not making small contributions now, they leave themselves open to larger contributions later.
We are losing employees to other towns for better wages, and better benefits. This is another example, towns offer DB plans are more attractive to prospective employees. I realize that in the private sector DC plans are the norm, but in the public sector, benefits and pension usually make up for the low wages.
We are losing employees to other towns for better wages, and better benefits.
Movement of town employees is not that straightforward. For instance, as of 18 mos ago, Hamden's defined bene's pension was (i think) $180,000,000 underfunded... I believe soon afterward, Hamden bonded about 50 or 60 million to "fund" the pension plan. But from the perspective of "taxes = spending," that's just moving numbers around... it's neither increasing taxes nor decreasing spending.
In fairness though... I didn't follow Hamden closely. But that's definitely what the legislature did with the teachers' pension fund this year... they just increased bonding... a shell game.
ok, their fund was underfunded, it had no impact on the plan offered! The town did not plan or match the contributions, this led to the fund being underfunded. The benefit was still in place. The Town of Cheshire has historically placed their employees second, as councilpersons have said in the past "they are lucky to have a job".
This is a management principle, not a leadership principle. The town should try to lead as opposed to manage, they would enjoy larger successes.
Also, Tim, before commenting on DB vs DC and other negotiated concepts, you should ask to sit in a negotation to see how the town operates during negotiations. You would be surprised.
The benefit was still in place
True, but as a 34-yr old, I fall in line with (what I believe is the majority opinion of) my peers... I don't expect to ever get social security... or at least the value of it will be much lower in relation to costs 30 yrs from now. I think the same way when it comes to any retirement plan... if it's not funded today, why should I expect it to be funded in 30 yrs? In all seriousness, I weigh such things in a job hunt... but maybe I'm the exception.
before commenting on DB vs DC and other negotiated concepts, you should ask to sit in a negotation to see how the town operates during negotiations.
good point and maybe I will ask during the next round (I've heard stories), but matching contributions are still not necessarily relevant to the negotiations. Heck, I've said before... I'd be willing to spend more on a DC, than on a DB, if we could move in that direction.
And if I offered $6 for a DC to replace $5 for a DB, then I maintain that "matching contributions" are largely irrelevant.
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