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Finance: What are Unfunded Pension Liabilities? 3 Views
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What are Unfunded Pension Liabilities? Companies with pension plans are obligated to set aside contributions into a separate fund in order to isolate the funds for compliance with ERISA and other regulations. When the company cannot accomplish this and finds itself paying pension distributions from current income instead, this is categorized as an unfunded pension liability.
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Transcript
- 00:00
Finance Allah shmoop What are unfunded pension liabilities What their
- 00:08
liabilities owed by the employer like a big corporation or
- 00:11
the government which were promises to employees for dough to
- 00:15
be around when they retired so that the employees could
- 00:18
you know like live live in a decent condo not
Full Transcript
- 00:21
in their old SUV Parked down by the river pension
- 00:24
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
- 01:56
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
- 02:37
that the state eventually wouldn't be ableto pay Our city's
- 02:40
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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