March 1, 2011

Defined-contribution plans help define security for workers

Eileen Norcross

Senior Research Fellow

As some states begin to consider moving away from traditional pension systems to plans similar to 401(k)s, beyond helping the states gain control of their ballooning deficits, defined-contribution plans also provide a safety net for public-sector workers.

This type of plan would ensure workers that the government will make an annual payment to their retirement.  There’s no such guarantee now, as we’ve seen with New Jersey, Illinois, and Pennsylvania.  These workers are still getting paid, but every year there’s a decreasing probability that the state will be able to do so in the future.

Moving to a defined-contribution plan would also allow younger workers more flexibility in their careers.

The current system encourages a lack of flexibility in the government’s labor market, because you need to stay put for 25 years to collect your pension.  With a defined-contribution plan, workers can carry their retirement savings to any job they hold in the future.