Defined Benefit Pension Problem

The primary problem with defined benefit pensions is that they rely on estimates of returns on their investments in order to decide how much to pay out.  Politicians and pension administrators decide what that number is, and if they choose a high number, say 7.75%, fewer taxes and lower contributions from participants have to be paid into it.  Likewise, a lower number means higher taxes and higher contributions.  The risk is that if the investment comes up less than the number, more taxes must be contributed to make up for the difference.  So if investments return 3% instead of 7.75%, the difference has to be made up some how by contributing higher taxes or paying out less.



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