Question

A. Describe the differences between a private defined benefit pension plan and a private defined contribution pension plan.   
B. Describe the circumstances that have contributed to the projected Social Security insolvency?

Answer 1

As the name suggests, the defined benefit pension plan provides a specified payment amount in retirement, while a defined contribution pension plan allows employees and employers to contribute and invest funds in the specified area till the retirement period.

Defined Benefit Pension Plan:

1. Guaranteed by the Employers

2. It is determined based on employee's salaries, years of service and other factors.

3. To get this benefit, employees have to stay on the job for atleast 5 years.

4. A specified amount for pension purpose is invested for the certain period of time by the Employers.

5. The employers only bear this investment risk.

6. Due to this risk,these plans require complex actuarial projection and insurance for guarantees, making the administrative cost high for the employer.

Defined Contribution Pension Plan:

1. This plans are funded by both the employer and the employee.

2. The contribution is equal from both the side.

3. The contribution can be invested depending on the employee's decision.

4. Therefore the employers do not face any investment risk.

5. These plans require little work and are low risk to the employer.