The Top 10 Advantages of Maintaining Defined Benefit Plans
NCPERS Research Series: June 2021
Public pension funding stands at a critical juncture. While critics argue that defined benefit (DB) plans are unsustainable and should be replaced with 401(k)-style defined contribution (DC) plans, the evidence tells a different story. This comprehensive research update (PDF) demonstrates that DB plans are not only more cost-effective and efficient retirement savings vehicles, but also provide greater retirement security and generate substantial economic benefits.
The data is compelling: in 2018, state and local governments contributed $162 billion into DB plans and received $341 billion in return through economic activity and tax revenues—$179 billion more than taxpayers contributed. Recent NCPERS research shows that this net revenue gain grew to $445.2 billion by 2023 (for more on pensions’ economic and revenue impacts see NCPERS Unintended Consequences research).
Far from being a burden, public pensions are net revenue generators that strengthen local economies. DC plans now provide only 24 percent of the retirement benefits that DB plans deliver, down from 39% in 2007—a dramatic 15% decline in just over a decade.
Pensions are also highly cost-effective for both employees and employers, especially in the public sector. They deliver the same or better retirement income at nearly half the cost of 401(k)-style individual accounts. Pensions pool resources and invest them over long-time horizons, which leads to higher investment returns and lower fees.
The Top 10 Advantages of Pensions vs. 401(k)s
1. Lower Short-Term Costs vs. Uncertain Long-Term Savings
Retaining a DB plan costs state and local governments less over the short term, while long-term cost savings of switching to DC plans are uncertain at best.
2. Comprehensive Benefit Coverage
Almost all state and local DB plans provide disability and survivor benefits alongside retirement income—benefits that would cost more if obtained separately under DC plans.
3. Enhanced Employee Recruitment and Retention
DB plans strengthen governments' ability to attract and retain qualified employees, reducing turnover costs and maintaining workforce quality in critical service areas.
4. Flexible Workforce Management Tools
DB plans enable governments to manage their workforce strategically through flexible incentives that encourage employees to work longer or retire earlier as needs dictate.
5. Superior Investment Performance and Lower Fees
DB plans earn higher investment returns and pay lower management fees than DC plans, resulting in significantly better outcomes for participants. Administrative and investment costs for 401(k)-style individual accounts can be more than four times higher than for pension plans.
Pensions are also highly cost-effective for both employees and employers, especially in the public sector. They deliver the same or better retirement income at nearly half the cost of 401(k)-style individual accounts.
6. Risk Pooling Reduces Costs
By pooling mortality and longevity risks across many participants, DB plans reduce the overall cost of providing lifetime retirement benefits compared to individual DC accounts.
7. Investment Earnings Offset Employer Contributions
DB plan investment earnings supplement employer contributions—from 1993 through 2019, about 60% of revenues came from investment earnings, reducing the financial burden for employees, employers, and taxpayers.
8. Secure, Adequate Retirement Benefits
DB plans provide secure retirement benefits based on salary and service, while DC plans deliver significantly smaller benefits. The annual benefit from a DC plan in 2019 was just 24% of that provided by its DB equivalent.
9. Economic Stimulus for State and Local Communities
DB plans sustain local economies by providing sufficient, steady retirement income. In 2018, public pension spending generated $1.7 trillion in economic output and $341 billion in tax revenues.
10. Reduced Demand for Public Assistance
DB plans help ensure adequate living standards throughout retirement, reducing pressure on governments to provide supplemental financial assistance to struggling retirees. DB plans in 2006 generated savings of about $7.3 billion in public assistance (approximately 8.5% of aggregate public assistance received that year by American households).
Key Findings
The shift from DB to DC plans in the private sector has created a staggering $16 trillion retirement savings shortfall. If public pensions followed this path, the consequences would be severe: lower retirement security for millions of teachers, firefighters, police officers, and other public servants; reduced economic activity in communities across America; and increased demand for public assistance programs.
The ratio of pension assets to benefit payments has remained stable at approximately 14 over the past decade, meaning public pensions have sufficient assets to pay benefits for about 14 years on average. This stability demonstrates that, contrary to alarmist claims, "the sky is not falling."
Download the complete research update to explore the detailed evidence, case studies from states that returned to DB plans after experimenting with DC models, and practical strategies for managing DB plan risks while maintaining their substantial advantages.