Suburban Chicago-based NorthShore University HealthSystem announced last month that it will “will freeze its employee pension plan as of Dec. 31 and shift all employees to a defined contribution savings plan.”
The NorthShore hospital system isn’t the only private company making this move — Boeing, American Airlinesand Verizon each dropped their defined benefit plans for defined contribution retirement systems.
The core problem with defined benefit plans is that they are unmanageable — regardless of whether it’s a state or a private company in charge. That’s why seven in 10 Fortune 100 companies provide only defined contribution, 401(k)-style retirement plans to new employees today.
This trend is in line with the private sector overall, where nearly 85 percent of employees are enrolled in 401(k)-style retirement plans.
In the private sector, defined benefit plans can bankrupt a company. Hostess and American Airlines both cited pension costs when filing for bankruptcy. Unfortunately, in the public sector, 401(k)-style plans have a difficult time gaining traction as a plausible solution. That’s because political leadership feels that it can prop up the defined benefit systems at the taxpayers’ expense through borrowing and tax hikes.
But borrowing and higher taxes won’t solve Illinois’ pension crisis because these “fixes” don’t address the problem. If political leadership wants to avoid the fiscal disaster that defined benefit plans caused in the private sector, they should follow the lead of Fortune 100 companies and implement 401(k)-style retirement plans for its employees.