Defined Benefit vs. Defined Contribution
In a defined contribution plan such a 401(k), most of the contributions to the retirement fund are paid by the employee. Although the employer may match contributions from the employee, the majority of the contributions come from the employee.
With a defined benefit pension such as those managed by CalPERS, members pay a fixed portion of their wages into the pension, usually 5% to 9% per paycheck, while the government employer pitches in the remaining expected cost of the pension. In a few cases, unions have negotiated contracts that obligate the employer to pay for the employee's contribution.
The annual retirement benefits are calculated using the following formula:
Benefit Factor x Years of Service x Highest Annual Base Salary for Three Consecutive Years = $Annual Pension Payout.
The benefit factor and the age when the member first draws upon retirement benefits are written into the employer's contract with PERS. For example, if the plan is 2% at 55, that means the member will 2% benefit factor if he retires at age 55, but this will often increase if he retires later. All plans set the minimum retirement age of at least 50.
Most additional types of compensation such as overtime, vacation cash-out, and bonuses do not count towards a CalPERS retirement benefits calculation. However, "pension spiking" is still possible if an employee goes to a position with a very high annual base salary in the final year of public employment. Monthly retirement payments are guaranteed for life, even if the member lives to be 120.
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