Pension Liability
See: Pension.
A pension liability is not that different from a liability owed by any corporation, like a debt obligation to pay back a bond, or 18 miles of tiny periscopes bought by Proctologists-R-Us. Corporations and governments both provide pensions for their employees. Very roughly, an employee making, say, 75 grand a year might get 10 percent of their salary a year in pension contributions from their employer.
Pensions are divided into two flavors. There are defined contribution pensions, one flavor of a 401(k) plan. In a defined contribution plan, the employee contributes, say, 10 percent of their salary...in this case, 7,500 bucks...and the employer might match it. That is, the employee takes 7,500 bucks off their total salary that's calculated for taxes, so instead of being taxed on $75 grand, they're taxed on $67,500, and they tax defer the $7,500 they put into their 401k plan.
They’ll still pay taxes on it eventually...but presumably when they're old and retired and poor and thus likely to pay lower tax rates than they would in their heavy working, high tax era at the peak of their careers.
So the employee saves 7,500 bucks, and the employer matches that $7,500 with $7,500 of its own. From the employer's perspective, that employee doesn't just get a $75,000 salary; they cost the employer $75k plus another 7,500 bucks of 401(k) pension matching expenses, or $82,500. And the employer pays it grumbling and wondering when the next version of robot comes out so they can replace this worker.
What happens to those savings? Well, employers usually provide employees with a menu of investment choices. They can hold all cash; they can invest in high growth relatively risky funds; they can invest in balanced growth and income funds, etc. The employee gets to choose from a supermarket of investment fund choices, or even buy individual stocks.
The key takeaway: at the end of however many years or decades of working, the employee is able to then take out from their pension whatever value that pension has accrued to be worth.
In a defined contribution fund, there is essentially no pension liability. The employee bears the stock market risk just like everyone else. The big controversies you read about in the press revolve around the second flavor of pension, called a defined benefit fund.
In a defined benefit situation, a number of irresponsible financial dealings take place where taxpayer money is often just given away with no thought of fiduciary duty. A given government worker works for the state for 30 years, eventually making $100k a year at the end, having received pension contributions all along the way, just as in the defined contribution system that corporations use, and as outlined above. But in a government defined benefit program, the employee is guaranteed a minimum rate of return in many situations. That is, they are guaranteed, say, 10% a year investment returns, even if the stock market is flat for 7 years, which happens all the time.
So that’s one flavor of pension liability that could likely bankrupt California and Illinois at some point not too far away. But it gets worse. There are other irresponsible things the states have done, like guarantee retirement return minimums or invest pension money in deadstock beanie babies.
So yeah. Pension liabilities are totally simple, easy-to-understand, uncontroversial, and can't possibly have an adverse effect on the world around us.
Hard to keep a straight face there.
Related or Semi-related Video
Finance: What are Unfunded Pension Liabi...3 Views
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
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