Unfunded Pension Plan

  

Categories: Retirement

Just see: Unfunded Pension Liabilities.

This very bad situation happens when companies and governments aren't thoughtful about budgets. A school teacher works for 30 years at what she feels is "below market wages," i.e., below the market of what she thought her talents would bring, so that she could do good things for smart, curious brains. She works for $42,000 a year for a long time, with the mitigating financial event being that the state for whom she works is contributing $6,000 a year in pension money for her, so that when she retires, she has well over half a million bucks in an index fund sitting around for her.

But, in fact, many states won't have nearly enough money to pay out the dough she is due. So...what then happens? If the state goes bankrupt, does the federal government bail them out? That would be highly unfair to states who were responsible with their money, right? Like...if you gave each kid $50 a week to put away for a college fund and 3 of your 4 kids dutifully did so...but the 4th just spent it all on candy and meth...why would it be fair, when that 4th kid is ready to go to college, for you to then just give her the dough she spent? How would kids 1, 2, and 3 feel then?

Tough political issue. Bad moon a-risin'.

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Finance: What are Unfunded Pension Liabi...3 Views

00:00

Finance Allah shmoop What are unfunded pension liabilities What their

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liabilities owed by the employer like a big corporation or

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the government which were promises to employees for dough to

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be around when they retired so that the employees could

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you know like live live in a decent condo not

00:21

in their old SUV Parked down by the river pension

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is just another word for retirement savings And clever union

00:28

negotiators somehow got the government and or corporate America Tio

00:31

Guaranty Stock market minimum investment returns so that employees under

00:35

this system would retire relatively wealthy with seemingly almost no

00:39

risk This problem is worth some explaining here Best example

00:43

California A state which you'd I think would be one

00:46

of the wealthier in the nation but in fact is

00:49

one of the closest toh bankruptcy currently in silver medal

00:52

position Teo Gold medal favorite Illinois in California For decades

00:57

politicians wanted to coddle police and firemen because they wanted

01:00

to look good to their constituents and get re elected

01:03

And other than burglars and arsonists Well who doesn't like

01:06

cops and fireman But politicians negotiated and their advisors presumed

01:11

that California's economy would always remain strong over time as

01:14

taxes crept upward in California businesses and wealthy individuals began

01:19

leaving and the Internet made telecommuting and other things dramatically

01:23

easier to manage So the tax dollars started to decline

01:27

as the wealthy and don't just a lot of businesses

01:29

began to leave the state and suddenly cities inside the

01:33

state no longer needed to grow their police and fire

01:36

forces In fact they couldn't afford the ones that they

01:38

already had And it was one piece of very bad

01:40

legislation that harmed things financially for the cities they created

01:44

a structure which most cities blindly followed in any given

01:48

city with say a hundred thousand people there likely dozens

01:50

and dozens of cops who are retired taking home today

01:54

Fifty to one hundred fifty thousand dollars a year in

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pension winnings which the taxpayers will pay until those cops

02:00

die Huge liability of many millions of dollars per year

02:04

for small cities and for cities finding financial life tougher

02:07

Well they're now changing things The cry from the local

02:10

population was that cutbacks would have to be made to

02:12

the police force and that this was dangerous for the

02:15

locals When a local dentist asked about cutting back the

02:19

ludicrously high pension grants to retired cops and fireman Well

02:22

you can imagine that the retired cops weren't too happy

02:25

about the suggestion And for good reason They did nothing

02:28

wrong They just cut the best deal they could It

02:31

was the government of those local cities who sold out

02:34

the people who sold out their future in these commitments

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that the state eventually wouldn't be ableto pay Our city's

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wouldn't be ableto pay well Cities have begun to simply

02:42

fire their entire police and fire departments and outsource them

02:46

to essentially a rent a cop or rent a fireman

02:48

organisation And those aren't subject to the onerous state managed

02:52

pension systems The Rent A cop Organizations pay fair wages

02:55

but don't suffer huge pension liabilities Well the jury is

02:59

out as it were in determining whether this will save

03:01

cities balance sheets or whether it's too late Well because

03:05

the pension liabilities have become such a large line item

03:08

in so many cities budgets like ten fifteen twenty thirty

03:11

percent of the city's budget now allocated the pensions They'll

03:14

garner a lot more scrutiny Going forward with the key

03:17

concept When you think about a pension liability is that

03:20

when an employee has hired the cost to the people

03:22

Hiring them isn't just their base salary In the case

03:25

of a normal school teacher or cop or fireman or

03:28

other analogous worker well they might make sixty two grand

03:31

a year in base salary and hope to get another

03:33

five grand for working overtime But the cost of the

03:36

employer is five grand a year for health care benefits

03:39

Just add that on top of the sixty seven add

03:41

on another five grand a year for dental vision and

03:44

other add ons at another five grand a year for

03:46

other benefits like free access to national parks and a

03:49

free Yahoo email account You know stuff like that Then

03:52

Additionally the employer has to kick in some ten grand

03:54

a year in pension contribution and then guarantee with makeup

03:59

money that that ten grand contributed each year will compound

04:02

at some negotiated minimum rate like six seven eight nine

04:06

ten percent a year So when you think about that

04:08

prototypical government worker working for the state for twenty five

04:11

years then retiring at half salary but full benefits will

04:15

the state is on the hook for not just one

04:17

hundred grand or so it cost to employ them while

04:19

they worked But for the expected next two to three

04:22

decades of their life the state is on the hook

04:25

to pay twenty five grand a year or so in

04:27

benefits and then on top of that pension make goods

04:30

along with a meaningful percentage of their salary So the

04:33

next time a government worker quotes to you that when

04:36

they only make sixty five grand a year you can

04:38

laugh in their face and suggests that they run for 00:04:41.108 --> [endTime] office as a politician

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