Think of a ship. Think of that ship taking on water. The question is at what point will it sink? That just about describes the budget situation for an uncomfortable number of state and local governments across the country as they measure the weight of their employee pension plans.
That’s why the Society of Actuaries in 2013 created the Blue Ribbon Panel on Public Pension Plan Funding, which released its report on Feb. 24. As the summary of recommendations says,
"The report recommends actions to strengthen financial and risk management practices by providing new information to trustees, funding entities and their elected officials, employees and their unions, taxpayers and other stakeholders. This information will help stakeholders better understand the risks being taken and borne by plans and how best to develop a long-term funding program.”
About one in 12 Americans, some 27 million employees and beneficiaries, are covered by state and local government pension plans, according to the U.S. government’s General Accounting Office, which did its own study on the pension issue between 2010 and 2012. What the GAO found is that while most state and local governments have the resources to cover pensions for up to a decade,
“pension plans still face challenges over the long term due to the gap between assets and liabilities. In the past, some plan sponsors have no made adequate plan contributions or have granted unfunded benefit increases…”
Trouble, meet the recipe for yourself.
Among the SOC’s Blue Ribbon Panel’s recommendations, according to Accounting Today:
- The costs of future retirement benefits should be pre-funded, and funded in a way that targets 100 percent funding of plan obligations. Median economic assumptions should be used to avoid being overly optimistic or overly pessimistic.
- Taxpayers receiving the benefit of today’s public employees’ services should pay the taxpayer portion of the costs of those employees’ pension benefits; funding programs should restrain the tendency to shift these costs to future generations of taxpayers.
- While the panel believes that stable costs will be difficult to achieve, it does recognize the benefits that predictable costs can bring to the sponsor’s budgeting processes over short periods of time.
Most government employee pension plans are defined benefit plans, through which employers pay a specified monthly benefit based on a formula. According to CNN Money, only about 10 percent of private sector employees are on a defined benefit plan (principally because of the cost). On the other hand, about 90 percent of state and local government employees are in defined benefit plans. If you’re a government official, a government employee, or a taxpayer, it could pay to have a look at the Blue Ribbon Panel’s recommendations.
In the best of all possible worlds they might help keep your pension ship afloat.
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