The pension crisis is a predicted failure of the currently practiced pension system’s ability to pay the pension of corporate and government-employed workers. Let’s help you make better sense of the problem in the United States so that you can ask the right questions from those in power.
This problem is caused primarily due to the difference between the funds available to perform this obligation and the actual fund needed. A reduction in the ratio of workers ratio per retiree is to blame for this shortfall; some factors that contribute to this reduction include a lower birth rate, retirees living longer and ultimately the inability of politicians to make plans beyond an election cycle.
Nine years ago, the fund deficit was put to be about $1 trillion to $3.23 using a discount rate of 8%. As at August 2010, the value of unfunded obligation under social security’s alone was put at $5.4trillion. In planer terms, the US government should have set this amount aside as at then to cover the shortfall between the revenues from tax and the expected payouts. The United States is currently more than $6 trillion short right now, and it is expected to hit 137 trillion dollars by the year 2050.
What the government does now is to store the funds as fiat currencies which can be compared to storing a collection of their own IOUs, since it is the job of the government to print money, printing now and saving it later won’t solve the problem as it would have the same devastating effect as printing it at later time. As such, that won’t be a viable alternative.
The Pension Benefit Guaranty Corporation needless say have a very uncertain financial future as a result of its inability to perform its obligations. The corporation liability currently exceeds its assets by over $101billion which is an increase from $16billion that was put forward at the end of the fiscal year in 2013. The corporation estimates that its exposure due to underfunded plans in both the single and multi-employer programs is $185billion, out of which single-employer program accounts for $175billion of the said sum. It is predicted that the multi-employer program will be insolvent by 2027.
As members of the baby boom generation begin to retire, it is estimated that 10000 Americans turn 65 every day, this means more and more people will depend on pension as its primary source of income. Even with these mind-bugling statistics, many US states have underfunded pensions because they did not contribute the amount they should, to pay future obligations to retired workers. The shortfall emerged after early 2000, which was earlier than I predicted, this is primarily due to the tax revenue decline that we had as a result of economic recessions. Employees of government-owned institutions depend on this a steady pension payout after retirement to survive.
Every state is guilty of underfunding pension; however some are at a more worrisome level than others with the smallest amount of underfunding being about $335million. Underfunding at state level is mostly due to the inability of lawmakers to manage risk, budget for demographic changes and the failure of pension managers to accurately forecast their expected return on investments.
The five states with the highest amount of pension shortfall are California ($987.7 billion), Texas ($397.3 billion), Illinois ($388 billion), Ohio (354.6 billion), and New York ($345.2 billion).
U.S. cities and municipalities also have their pension programs. There are over 3,200 locally administered pension programs on record, and this in total, has over $600 billion in unfunded liabilities. The term unfunded liabilities refer to funds that should be set aside for so that the interest and principal would cover the gap that exists between the money that comes in, and the expected obligation. It is estimated that pensions gulp over 20% of municipal budgets, and if this continues, municipals will exist just for pensions as they won’t have any money for other expenses.
Much has been discussed about this “ticking time bomb”, and despite the genuine worry among savers, and the lackluster attitude among policymakers, it’s not all doom and gloom. You can make some decisions that’ll protect your funds and grow your investment, have a face to face discussion with your Accountant to consider all options available for you. It is important to note that when those savings translate into a retirement income, taxes matter. You should find a Tax preparer and discuss with him/her as you won’t just be taxed based on your pre-tax income and earnings, but also on any interest, you earn on these funds.
CONTINENTAL TAX AND ACCOUNTING SERVICES