Wow. In a paragraph trying to distinguish DB from DC, that couldn’t possibly have been more confusing.

Weakonmist- you make an interesting point, in some jurisdictions the public purse has to bail out private pension plans (although there are limits to the contribution).

Preet- I am not sure the boomers have any more credit to spend. We may be going from over-leveraged based down-turn to demographically induced down-turn. Yikes.

This probably isn’t the best phrasing. The difference between the two plans comes down to who accepts both the risk and the reward of the plan’s investments.

In a defined-benefit plan, the plan’s sponsor (the employer) accepts both the risk and the reward. If the plan’s investments do poorly, the employer has to make up the shortfall, but the employer also gets the reward if the plan’s investments do well, because the employer’s share of contributions can be reduced when the plan is over-funded.

A “defined contribution” plan is basically just an investment account where the employer and the employee contribute. The employee doesn’t have any guarantee that they will receive a specific pension – at retirement they will have a pool of cash to draw income from, and the income will vary depending on how big the pool of cash happens to be – in other words, the employee gets both the risk and the reward – if the plan’s investments go south, the plan won’t have as much money to pay out a pension to that retiree. Of course, if the investments do very well, the retiree could get a very high income.

The reason for the switch to defined-contribution plans is that, from the employer’s perspective, the risks are too high and the rewards too low, so they would rather pass off those risks and rewards to the plan’s members (their employees).

My mom will be on a pension when she retires, since it’s a state pension I know my taxpayer dollars will bail her out if there are any shortfalls of money.