Unfunded Pension Plan

Finance Allah shmoop What are unfunded pension liabilities What their

liabilities owed by the employer like a big corporation or

the government which were promises to employees for dough to

be around when they retired so that the employees could

you know like live live in a decent condo not

in their old SUV Parked down by the river pension

is just another word for retirement savings And clever union

negotiators somehow got the government and or corporate America Tio

Guaranty Stock market minimum investment returns so that employees under

this system would retire relatively wealthy with seemingly almost no

risk This problem is worth some explaining here Best example

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

of the wealthier in the nation but in fact is

one of the closest toh bankruptcy currently in silver medal

position Teo Gold medal favorite Illinois in California For decades

politicians wanted to coddle police and firemen because they wanted

to look good to their constituents and get re elected

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

cops and fireman But politicians negotiated and their advisors presumed

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

taxes crept upward in California businesses and wealthy individuals began

leaving and the Internet made telecommuting and other things dramatically

easier to manage So the tax dollars started to decline

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

began to leave the state and suddenly cities inside the

state no longer needed to grow their police and fire

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

already had And it was one piece of very bad

legislation that harmed things financially for the cities they created

a structure which most cities blindly followed in any given

city with say a hundred thousand people there likely dozens

and dozens of cops who are retired taking home today

Fifty to one hundred fifty thousand dollars a year in

pension winnings which the taxpayers will pay until those cops

die Huge liability of many millions of dollars per year

for small cities and for cities finding financial life tougher

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

population was that cutbacks would have to be made to

the police force and that this was dangerous for the

locals When a local dentist asked about cutting back the

ludicrously high pension grants to retired cops and fireman Well

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

about the suggestion And for good reason They did nothing

wrong They just cut the best deal they could It

was the government of those local cities who sold out

the people who sold out their future in these commitments

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

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

fire their entire police and fire departments and outsource them

to essentially a rent a cop or rent a fireman

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

pension systems The Rent A cop Organizations pay fair wages

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

out as it were in determining whether this will save

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

the pension liabilities have become such a large line item

in so many cities budgets like ten fifteen twenty thirty

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

garner a lot more scrutiny Going forward with the key

concept When you think about a pension liability is that

when an employee has hired the cost to the people

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

of a normal school teacher or cop or fireman or

other analogous worker well they might make sixty two grand

a year in base salary and hope to get another

five grand for working overtime But the cost of the

employer is five grand a year for health care benefits

Just add that on top of the sixty seven add

on another five grand a year for dental vision and

other add ons at another five grand a year for

other benefits like free access to national parks and a

free Yahoo email account You know stuff like that Then

Additionally the employer has to kick in some ten grand

a year in pension contribution and then guarantee with makeup

money that that ten grand contributed each year will compound

at some negotiated minimum rate like six seven eight nine

ten percent a year So when you think about that

prototypical government worker working for the state for twenty five

years then retiring at half salary but full benefits will

the state is on the hook for not just one

hundred grand or so it cost to employ them while

they worked But for the expected next two to three

decades of their life the state is on the hook

to pay twenty five grand a year or so in

benefits and then on top of that pension make goods

along with a meaningful percentage of their salary So the

next time a government worker quotes to you that when

they only make sixty five grand a year you can

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