If retirement is a long way off for you, it’s understandable that you might tune out what’s been happening with New Hampshire’s pension fund. Putting it simply, the defined benefit pension plan ensures that you and your family have a secure future, and that the state doesn’t dig itself further into the unfunded liability mess it’s created for itself. Here are some key points on why keeping the defined benefit (DB) pension makes more sense for younger workers than the proposed defined contribution (DC) plan:
- Defined contribution plans are more costly: Two reports found that switching plans would increase the unfunded liability. This is largely because there would be fewer members paying into the system, leaving fewer dollars to reduce that liability.
- Cost gets passed down to you: With the unfunded liability rising, employers would have to pick up more of the tab. Those employers include the state itself and many local communities. It is foolhardy to believe these employers will be able to offset the added expense with new revenue. This means higher tax rates for you and a decrease in vital public services.
- You take all the risk, too: Unlike a defined benefit plan, the defined contribution plan forces you to take on all the risk of investment. The only thing that’s well-defined is how much you have to put in. How much you eventually benefit depends on how well your investments perform.
- DB plans perform better: The pension fund has been at this a while. It’s negotiated lower rates and takes a long-term view, and the results show a DC plan could leave you with as much as 15% lesser benefit.
- Who’s benefiting? With DC plans, fees paid to Wall Street banks take a bite out of your benefit.
- Will it be enough? In order to make the DC plan more appealing, employer contribution rates were set at a lower level to make it look like the employee is getting a good benefit, even though it’s mostly the employee paying. That said, those contribution rates might not even be high enough to accumulate enough money to ensure an adequate retirement income.
- Not fixed: In 2008, the legislature adopted a plan to fully fund the DB plan. However, in 2010 the Bill O’Brien led legislature “fixed” the plan by enacting changes that undercut the 2008 plan, making the situation worse. This is the action that led to SEA and other labor unions to file lawsuits against the state’s actions, which we expect to prevail and correct the situation. At O’Brien’s insistence, the legislature is still considering the DC plan that will allow lawmakers to continue to raise your employee contribution rates. Remember, with a DB plan, you have a guaranteed benefit – not a benefit based on Wall Street AND the legislature.
- Portable, yes, reliable no: A perceived bonus to DC plans is that you can roll the money over when you leave for a new job. But that doesn’t matter if your investments don’t perform well. Again, the DB plan offers a better assurance that you’re not left without a safety net in your senior years.
Retirement may seem light years away to younger employees. You may think you have plenty of time to prepare. In the meantime, you need to ask yourself these questions:
- Do I want to work into my 70’s to meet my living expenses?
- Do I have the time and knowledge to manage my own 401K type plan?
- Do I want to bet on Wall Street’s actions?
- Can I afford to pay higher taxes for the rest of my years caused by converting the system from DB to DC?