Underfunded pensions, mainly for government employees, are a disaster waiting to happen, and the concern about underfunded pensions is rising daily as the number of newspaper articles on the topic increases.

While most corporate employers shifted from pension plans to 401(k) plans after the early 1980s, governments still offer pensions to employees. Those pensions have left retirees and taxpayers in a bind that has fueled political battles while continuing to enrich investment consultants and managers. The result is that overly optimistic estimates of investment returns, which determine how much governments must pay to fund the balance, have left many plans massively underfunded even as the plan administrators and advisers who managed them received huge fees.

Those most likely to be hurt and hurt the most are retirees and taxpayers. The money to pay future retirement benefits to government workers such as firefighters, policemen and teachers comes from two sources: contributions made by governments to the funds, (from taxes) and investment growth. The more the funds’ investments grow, the less taxpayers must contribute.

To ensure that there will be enough money to pay retirees’ benefits later, contributions must come in every year, but the calculation of how much depends on future investment returns. Thus, the assumed future rate of return on investment is critical. The higher the assumption, the less taxpayers must contribute.

Full Content: Daily Republic

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