The Austrian suggested a pension shift from defined benefit to defined contribution leaving the state in a fiduciary role and provided no details of the definitions. The proposal had the appearance of short term savings, if you didn't look to closely, with little suggestion of the final costs. An Austrian hallmark.
First, of the two, defined contribution is the most expensive in a rising market with matching contributions up to 15% of gross wages not uncommon. As wages skyrocket, so do employer contributions. Further aggravating circumstances, the perception of inflated wages for services rendered, a common mind set in government employment, invites maximum employee participation. After all, it's free money.
Second, at the collection end, defined contributions usually enjoy income tax protections. In this case, the safe harbor shelters billions of dollars annually from the General Fund.
Third, overtime compensation is considered in defined contribution but not in defined benefits. For a correctional officer, that could triple the defined contribution.
Last, the only notable risk to the union member is the market and it's been almost 100 years since the last collapse.
Time to do your homework professor.
I have done plenty of homework on public DB plans. My research is based on the best set of data ever collected about public employee pensions. My study demonstrated the incredible windfall given to public employees in Colorado. This incredible windfall is a taxpayer nightmare. California’s pension plan is roughly comparable to Colorado’s plan so the same situation is roughly true in California.
Retirement compensation in the public sector is much higher than the private sector despite deliberate efforts by public agencies to indicate otherwise. Public employees retire on average at much younger ages with higher retirement income than private sector workers. Many public employees are not subject to the Social Security boondoggle, another huge advantage for the public sector. In my study, the value of the defined benefits to public employees would increase their compensation 25% to 35% on average.
I do not know the specifics of the Austrian’s proposals. I would propose a transition to DC plans similar to the situation in Michigan. In 1997, the Michigan legislature wisely transitioned employees to a new DC plan. There were provisions for long term employees to remain in the DB plan. Public employees in Michigan (except teachers) are in a DC plan, saving the taxpayer huge sums without sacrificing the quality of the public workforce.
The private sector no longer has DB plans like the plans offered in Colorado and California. The private sector fully realizes the enormous cost of these plans compared to DC plans. DB plans like Colorado and California would collapse without massive tax payer bailouts.
The only way to reveal the true cost of DB plans is to privatize them. If state governments were forced to put these plans to competitive bid without any hope of taxpayer bailout, pension costs would skyrocket. The private sector does not offer wage indexed securities so the true cost is difficult to estimate.
There are many studies that demonstrate the inbalance between public and private compensation. Public employee compensation far outstrips private sector compensation in many areas. Retirement compensation including pensions, early retirement medical, and disability are vastly superior in the public sector.
Correctional officers are not denied retirement compensation based on overtime. Correctional officers can contribute to an optional 401K or save independently. You are complaining that you cannot spike your pension even higher with overtime compensation.
Defined benefit pensions have incredible tax advantages. Most importantly, public employees in many places do not pay social security tax. Social security taxes are not sheltered despite that many retirees pay taxes on their social security benefits. Public employees can contribute their social security amount to an optional 401K. Since combined employer/employee pension contributions substantially understate the true cost of the benefits, public employees can effectively shelter contribution levels approaching 50% of their income.
If DB and DC plans were comparable, public employee unions would not scream every time a politician wants to end DB plans. The unions understand the hidden deferred compensation. Unfortunately, politicians and the public do not.