Public employee pension plans (called PERS for public employee retirement system in some states) are generally a defined-benefit retirement plan. A defined-benefit retirement plan provides a benefit at retirement based on a member’s years of service, age, and highest compensation. (A defined-benefit plan is different from a defined-contribution plan-such as a 401(k)- which provides a payout at retirement that is dependent upon the amount of money contributed and the performance of the investment vehicles utilized.) Public employee pension plans are typically funded by employer contributions, employee contributions, and earnings from investments.
Public employee retirement systems, like most investors, lost money during the 2007-2009 economic downturn, but in a defined-benefit system, the pension plan must pay the specified amount of the retiree’s benefit. Depending on the market and how the retirement system invested, there may need to be an increase in the contributions of current employees to make up any shortfall in the fund. Or the state may increase taxes to make up any pension shortfalls, or future retiree benefits could be scaled back. The bottom line: No pension is 100% “safe” these days. Workers in both the public and private sector need other savings to enhance their future financial security.
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