Reason Foundation has just released a post responding to a number of frequently raised objections to pension reform involving defined contribution (DC) plans. These arguments range from the usual complaint that DC plans are inadequate to deliver retirement security compared to defined benefit (DB) plans to the absurd claim that switching to DC plans would increase rather than decrease government’s costs and debt. Most of the objections stem from a misunderstanding of pension funding or a lack of awareness of the critical difference between DC and DB plans. What truly sets DC plans apart from DB plans lies in who bears the investment risks and in the timing of benefit promises and payouts. Recognizing these two defining features of DC systems is the key to understanding pension reform.
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