From the Brooklyn Beat - Fall 2006
What's the Difference Between a Defined-Benefit and a Defined-Contribution Plan?
With the 65th Biennial Convention in the record books and the Executive Council heading into negotiations with the Postal Service for a new contract, we should look back over the last 6 years and realize how unprecedented that contract was.
With the eighth cost-of-living adjustment under the 2001-2006 National Agreement of $790 annually effective the pay period beginning September 9 (pay date September 22) the annual salary of a letter carrier salary will go up to $49,218 annually, an increase of $6,583 or $253.19 per pay period for (CC Grade 1, Step 0). COLAs have accounted for over 50 percent of the total increase in salary. The postal service will be looking to attack those COLAs along with having its employees contribute more towards their health cost and possibly reducing pension benefits. Employer-provided pensions are an essential part of retirement security. But fewer employers today provide pension benefits for their workers and among those that do, many are offering "defined-contribution" rather than traditional "defined-benefit" pension plans.
Most union-negotiated pension plans are defined-benefit pension plans, which for decades have guaranteed retirees a fixed monthly income. These defined-benefit plans are usually funded entirely by employers through tax-exempt contributions and automatically cover all qualified employees. Since 1978, the number of defined-benefit plans plummeted from 128,041 plans covering some 41 percent of private-sector workers to only 26,000 toŽday, according to the nonpartisan Employee Benefit Research Institute. The U.S. Bureau of Labor Statistics finds 21 percent of workers in the private sector have defined-benefit pensions.
Many companies have eliminated their defined-benefit plans and others have reduced the value of benefits and shifted to providing benefits through 401 (k)s and other defined contribution plans. In these plans, the employer only contributes a fixed amount to the plan each year. Defined-contribution plans shift the investment risk and responsibility to individual workers and typically reduce corporate costs.
Union Workers Have a 'Union Advantage' in Pensions
Because they have a voice at work, union workers have a "union advantage" in benefits and are much more likely to have pensions-and good pensions than nonunion workers. Seventy-nine percent of union workers are covered by pension plans, compared with 44 percent of nonunion workers. And 70 percent of union workers have defined-benefit retirement coverage, compared with 16 percent of nonunion workers.
Your employer and in some cases your union can provide details about your own pension plan, but many online resources can help you keep an eye on your future retirement security