Public Sector Pension Plans: Defined Benefit Versus Defined Contribution

Abstract

California faces large costs in funding its public sector pension plans, and its governor has proposed replacing its traditional defined-benefit plans with a 401(k)-type defined-contribution plan. This proposal, which will probably go directly to the voters in June 2006 and has generated nationwide interest, does not stand alone. Other states have adopted similar measures, and nonunion employers in the private sector have already shifted to defined-contribution and cashbalance pension plans. Other established industrial economies have also revised their retirement income programs in response to the increased competition from new entrants to the global economy. This article examines this development with attention to the arguments on both sides of the issue, what has already happened elsewhere, and the likely outcome of the current debate.