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Defined Benefit

A defined benefit plan is an employer-sponsored retirement benefit that provides workers, upon attainment of designated age and service thresholds, with a monthly benefit based on the employee's salary and length of service. The value of a DB plan benefit is not affected by the return on the assets that are invested to fund the benefit, although some DB plans in the public sector link post-retirement cost-of-living adjustments to investment performance. DB plans, also known as pension plans, are the central organizing element of the public retirement system community.

According to the U.S. Bureau of Labor Statistics, approximately 85 percent of employees of state and local government participate in a DB plan (this also includes those who participate in hybrid retirement plans); substantially all of the remainder participate in a defined contribution plan.

How Pension Benefits are Calculated

Public pension plans typically base the value of the benefits on a formula that includes the participant's final average salary, years of service credit, and a retirement multiplier. For example, an employee retiring with a final average salary of $60,000 with 20 years of service, participating in a plan with a retirement multiplier of 1.7 (1.7 percent per year of service) would be eligible for an annual pension benefit of $20,400: $60,000 x 20 x .017 = $20,400.

Retirement Multiplier

The retirement multiplier is a factor that determines the amount of a retired employee's annuity. The multiplier is usually determined as a percentage of final average salary (FAS) times years of service.

Service Credit

Service credit refers to an employee’s length of employment. Service credit is used both to determine an employee's eligibility for retirement (in most, but not all, plans) and to determine the amount of the participant’s benefit as calculated in the retirement formula. (In some cases, service credit can be purchased, usually with interest and for work performed with another employer and the retirement benefit for that work has been forfeited.)

Final Average Salary

Final average salary (FAS) refers to the method used by defined benefit pension plans to determine an employee’s salary for purposes of calculating a retirement benefit. FAS is sometimes referred to as final average compensation (FAC).

Better Bang for the Buck
 

A 2014 study by the National Institute on Retirement Security found that a DB plan can pay the same benefit as a DC plan, at a cost 48 percent lower than the DC plan. This is largely because DB plans pool longevity risks, rather than requiring plan participants to manage their own longevity risk. DB plans also enjoy greater returns on investment due to professional management and the advantages of economies of scale.
 

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Become A Member

Becoming a member of NASRA offers a unique opportunity to join a community committed to the sound, efficient, and innovative stewardship of public retirement systems. Membership connects you with a network of professionals and experts, providing valuable insights into managing public retirement systems with a focus on sustainability and risk-averse strategies.

By joining NASRA, you gain the tools and resources to enhance the management of public retirement systems, ensuring their long-term success and reliability for generations to come.

What's New at NASRA: Government Spending Issue Brief

NASRA’s March 2026 update on government spending makes a basic but important point: public pension benefits are not paid out of a government’s day-to-day operating budget. They are paid from trust funds that employees and employers contribute to during an employee’s working years. Those trusts distribute more than $400 billion each year to retirees and beneficiaries in communities across the country. On a national basis, employer contributions to pension trusts in FY 2023 equaled 5.16 percent of direct general spending by state and local governments, which shows that pension contributions remain a limited share of overall public spending even though the level varies from one state to another. 
The brief also shows that pension costs should be viewed in the context of the changes governments have made over the past 15 years to strengthen plan funding. Following the 2008–09 market decline, nearly every state and many local governments adjusted contributions, benefits, or both to improve pension sustainability. More recent data show that employer contributions increased from FY 2022 to FY 2023, but pension spending as a share of total government spending remained broadly stable. The updated brief provides FY 2023 figures and also projects the aggregate pension spending rate for FY 2024, offering a useful snapshot of both current costs and the longer funding trend.