Imagine an employer gives a turkey to his employees each year for Thanksgiving. Then one year, the cost of the turkey doubles, but he still gives everyone a turkey anyway. That year, the employee is getting an increase in the value of their pay (the extra cost of the turkey).
The same logic applies to a person getting insurance with their job. If a person gets a 2% pay increase, but the medical benefits costs for the employer also increases $30 more a month then the employee pay goes up 2% plus the $30.00. Many people don’t understand those “hidden” costs regarding benefits and compensation, but that’s how it works.
In the same way, if the cost of providing a defined benefit plan costs your employer now 25% more, or goes up by X dollars more, that X dollars is ultimately additional pay going to you, whether or not you tangibly see it. Nowadays, mainly government workers and some unions are typically the only ones who have defined benefit plans; most employers have moved away from them to a defined contribution plan because of the spiraling costs inherent in a defined benefit plan. A downside, however, is that regular people in private sector jobs with 401Ks critically need to put more of their own money away for retirement because their money investment is growing so slowly.
On the other hand, Obama’s administration is doing two thing that are directly and substantially increasing the cost of employers to maintain a defined benefit plan: 1) keeping interest rates so low that employers just have to invest more just to get a decent rate of return; and 2) increased regulations, which slow the growth of business and impede business gains, thereby slowing the rate of return. On top of this, the government is ignoring the huge increased cost of fringe benefits they provide (i.e, the turkeys) in their budgets – something a private company simply cannot ignore. If a private company were to do so, then it risks going out of business . Therefore, it must account accurately and completely for its costs.
The government however, won’t ever go out of business. It merely passes off these huge costs to the employee – or worse, to the taxpayer. Higher costs to the taxpayer means less money for you. Less money for you means harder savings for the future.
Overall, you will need to put away more for retirement. If you have a defined benefit plan, the long-term projections and promises may be scaled back at some point in the future once the plan proves to be unsustainable. In a defined contribution plan, continued sluggish growth for investments make it difficult for retirement plans. Whatever your strategy, know that you will definitely need more than you think you do right now.