Defined benefits and defined contributions

Guest-poster Camilo Wilson lives in Monterey, California. He has had a long, long career in computers and software, including writing the popular VolksWriter word processor and publishing Correct Grammar and the American Heritage Dictionary. He is the founder of his very privately held cogix.com. He studied political philosophy in Berkeley in the 60’s and incorporated that world view into a self-designated fiscally responsible liberal in 1980. He likes living in the forest.

Currently, Social Security pays a predictable amount until the end your days, just like a “defined benefit plan”. The privatization proposals take 2/3 of employee contributions and invest them in a classical “defined contribution plan”.

This terminology is important, as many people who care about retirement understand the difference perfectly well. A defined benefit spells out what you’re going to get, and it is the government/employer’s problem how it will meet its obligations, not yours. A defined contribution plan relieves that burden from the government/employee and transfers it squarely onto you, who now must make wise investment choices to make the money last until the end of your days.

The need to invest aggressively guarantees that people will make poor choices, and makes them specially vulnerable to greedy promoters. With the privatization option, you’re giving up a rock solid, predictable pension for the rest of your life in return for a small amount of money you can gamble put to work today.

m4s0n501

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