DEFINE THE CONTRIBUTION, NOT THE BENEFIT:

The End of the Defined Benefit (Michael Barone, 4/25/11, National Review)

The defined benefit is dying. Barack Obama is struggling to keep it alive, but it’s apparent that it’s something that even as bounteously rich a society as ours can’t afford.

Yes, I know that “defined benefit” is not a common household phrase. But most people know what a defined-benefit pension is. It’s when your employer promises to pay you a certain amount of money, pegged to your salary or according to some other formula, when you retire.

Some 30 years ago, most big employers had defined-benefit pension plans. Some private-sector employees still have them, and many government employees do.

But a little-known provision of the 1978 tax law, section 401(k), authorized companies to offer defined-contribution pensions. Instead of promising to pay workers specific amounts years later when they retired, companies would put certain amounts in the employees’ 401(k) accounts.

The employees would own the money and choose among investment options. The money wouldn’t be taxed until it was removed from the 401(k) accounts years later.

It’s easy to understand why employers prefer defined-contribution plans. Once they’ve paid the employees, they don’t have any further obligation.

Many employees like them, too. They have actual money, not a claim on some fund someone else is managing. They can move from one job to another rather than stay with one employer for many years until their defined-benefit pension is fully vested.

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