The Retirement Plan Solution: The Reinvention of Defined Contribution

Chapter 14. Collective Defined Contribution

As we contemplate the reinvention of the defined contribution (DC) system, it is in the ability to focus on postretirement income that we (in particular, the United States) have the furthest to go. The Dutch and Canadians show that there are imaginative ways to get there, "collective DC" being one approach that differs substantially from the Australian and American models. While it is the Dutch who are responsible for the name given to this approach, it is the Canadians who have been doing it for decades.^[116]

Our purpose in this chapter is just to discuss the principles, rather than to present a treatise on how collective DC works. Indeed, though the principles can be stated briefly and simply, there is no shortage of ways to apply them, and they can be applied well or badly.

THE PRINCIPLES

The three financial principles are as follows:

• Employers make defined contributions. These plans originated in Canada, as multiemployer plans in industries where employers were often small and drew on a unionized labor pool to find workers for the jobs they contracted for. Every few years the employers' association and the union typically negotiated a contract under which workers were paid an hourly wage, with benefits financed via hourly contributions into benefit funds (including a pension fund) on behalf of each of the workers.

  Under this arrangement, the employers know what their total hourly wage bill amounts to. Even though the benefit contributions ...