A pension benefit meant to allow Springfield police and firefighters to take early retirement is now underfunded. Employee contributions have been unable to keep up with the cost of this benefit. With the shortfall increasing, Springfield officials are asking whether taxpayers or employees will have to cover the gap.
It is unfortunate that taxpayers and employees are in this position, but this situation could have been avoided if the Springfield Police-Fire fund was a defined contribution plan instead of a defined benefit plan.
Defined benefit plans are plans where retiree benefits are guaranteed based on a formula that typically takes into account various factors like years of service and final average salary. Since the benefits are guaranteed, this creates a liability for the pension plan which must keep paying out benefits as long as the pensioner is alive.
With defined contribution plans, benefits are paid at retirement and consist of the employer and/or employee contribution plus any investment gains or losses. There would be no underfunding of promised benefits since the balance of the account is the benefit. It would also spare taxpayers from having to make up any funding shortfalls since there is no liability going forward.
Alas, Springfield’s police and fire pension is not a defined contribution plan and it is possible that taxpayers will have to cover any shortfalls that occur. For cities/states that want to avoid situations like this, transitioning to a defined contribution plan might be the way to go. It is not a cure-all (benefits already accrued will still have to be paid for), but it could prevent a potential problem from turning into a catastrophe.
