PENSION CRISIS: Key terms
Defined-benefit plans, or pensions: The employer and employee pay into a fund, pooling other payments to be invested. When employees meet certain qualifications, they are eligible to receive a retirement payment every month for life. The amount of annuity in Pennsylvania is determined by retirement age, years of service and final average salary.
Defined-benefit plans are designed so the employer and the employee fully fund employees' retirement benefit during their working lifetime. Historically, investment earnings have been the primary source of funding for the commonwealth's two major public pension systems.
Defined-contribution plans, or 401(k)-style: Each employee has his or her own account. The employer puts a predetermined amount, or defined contribution, into the employee's account. This is usually a percentage of the employee's salary or a match of the employee's own contributions up to a certain limit. The employee has control over how to invest the sums, usually through a menu of employer-provided options. Upon retirement, the employee gains access to whatever sums are in the account, including investment gains or losses.
Hybrid plans, or cash balance: As a general rule, these plans maintain a defined-contribution plan for employee contributions and a defined-benefit plan for employer contributions. Most strive to retain some level of mandatory participation by employees, shared financing, pooled assets that are managed and invested by professionals and a lifetime retirement benefit.