How the Public Sector Pension Crisis Will Impact You

Money For the Rest of Us

J. David Stein

Investing, Investing Podcast, Business, Economics, Economy

4.5 • 1.4K Ratings

🗓️ 18 September 2019

⏱️ 33 minutes

🔗️ Recording | iTunes | RSS

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Summary

Why most state and municipal pension plans are underfunded and why that could lead to higher taxes and reduced government services. Why participants in state government retirement systems have greater protection against benefit cuts than participants in municipal retirement systems.

Topics covered include:

How defined benefit plans work.
Why there is more subjectivity regarding valuing a pension plan's liabilities compared with its assets.
What does it mean for a pension plan to be underfunded, and why are so many public sector pension plans in that situation.
Under what circumstances can a pension plan cut benefits to beneficiaries.
Why underfunded pension plans will most likely lead to higher taxes and reduced government services.

Thanks to WIX and Peloton for sponsoring the episode.

For show notes and more information on this episode click here.

[0:18] The crisis of underfunded defined-benefit state and city pension plans.
[2:32] Calculating the financial value of a public pension plan.
[4:46] What rate of return should public pension plans use?
[8:44] Why public pension plans are highly underfunded.
[11:34] Kentucky’s 13%-funded pension plan raises red flags.
[13:37] Failing to meet the needs upfront causes a funding crisis down the road.
[15:33] Why states cannot go bankrupt but cities can.
[17:52] How do public sector pension plans affect tax-payers?
[20:18] How states and cities are trying to solve the crisis.
[21:45] Considering underfunding when deciding what to invest in or where to live.
[24:09] How private-sector pension plans could possibly affect tax-payers.

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Transcript

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0:00.0	Welcome to Money for the rest of us. This is a personal finance show on money, how it works, how
0:07.0	to invest it and how to live without worrying about it.
0:10.0	From your host David Stein today is episode 269, its title, How the Public Pension Crisis
0:16.2	will Impact You.
0:18.7	Last week I mentioned a member of Money for the Rest of Us plus who's retiring and has the opportunity to purchase
0:26.7	into the Nevada State Public Employment Retirement System. She can pay $86,000 and will then receive an additional $550 per month for the rest of her life.
0:39.0	We looked at the economics of the transaction, given her life expectancy of 24.6 years, that income
0:47.4	stream, that $550 per month for the next 24.6 years, if she pays $86,000 for that, that equates to a 5.8% internal rate of return.
1:01.1	That's a pretty good return. What we then have to evaluate is the default risk.
1:07.4	What is the likelihood of the Nevada public retirement system and the state of Nevada defaulting on that obligation.
1:18.0	Could her benefits be cut?
1:21.2	In today's episode, we're going to take a closer look at that particular public retirement system, as well as all public retirement system, because there's a crisis going on.
1:30.0	Most of the state and county and city retirement systems
1:37.0	defined benefit pension plans are underfunded.
1:41.0	The American Academy of Actories point out that pensions are a form of deferred compensation.
1:49.0	Participants essentially trade compensation today for future benefits. This
1:55.0	participants essentially trade compensation today for future benefits. And just like with this plus member,
1:58.0	this particular defined benefit plan
2:01.0	would offer her fixed lifetime income assuming she qualified in other
2:07.4	words had worked a sufficient number of years to do so and in this case she did
2:11.2	and now she has the opportunity to actually purchase additional benefits,
2:15.2	but that's how a defined benefit plan works.
	...

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