Defined Benefit Pension
A retirement plan where the employer guarantees a specific monthly payment for life based on years of service and final salary — the traditional government pension.
How It Works
Defined benefit (DB) pensions promise retirees a formula-based benefit, typically 1.5-3% of final average salary per year of service. A 30-year employee earning $60,000 with a 2% multiplier would receive $36,000/year (2% × 30 × $60,000). The employer bears the investment risk — if pension fund investments underperform, the city must make up the difference with higher contributions. Most private companies have abandoned DB pensions, but they remain the standard for government employees.
Related Terms
- Funded Ratio — The percentage of a pension plan's projected liabilities that are covered by current assets. A plan with $80 in assets for every $100 in liabilities has an 80% funded ratio.
- Unfunded Liability — The difference between a pension plan's projected liabilities (what it owes to current and future retirees) and its current assets. Also called the unfunded actuarial accrued liability (UAAL).
- Defined Contribution Plan — A retirement plan where the employer and/or employee contribute a fixed amount to individual investment accounts (like a 401k or 457b), with no guaranteed benefit amount.
- Actuarial Assumption — The financial and demographic projections used to calculate pension costs and liabilities — including expected investment returns, employee life expectancy, and salary growth.
About This Definition
This definition is part of the CitySpend Municipal Finance Glossary — 59 terms explaining how city governments fund and manage public services. All definitions are written in plain language for taxpayers, journalists, students, and municipal bond investors.