[Today’s run: 2.5 miles with wife and dog]
I work for a joint-action agency put together by multiple municipalities (cities). A big attraction of my job is the benefit package. We have a pretty good medical benefit and an old fashioned, defined-benefit pension program.
A defined-benefit program means that, should I eventually retire, I’ll get a regular monthly check based on a formula which includes my years of employment and my salary.
Public employee pensions have been in the news in the last few months. It is up to the agency who is doing the employing to set funds aside to cover the future obligations of the pension plan. They may think they are paying me $X, but they really have to pay me $X and pay the pension fund another smaller $x so that there is money available to pay me later.
The pension fund supposedly earns interest. So as the interest rates have gone down overall, the pension funds have not earned as much. That means more money has to go in up front to cover the future outputs. The future outputs are set in advance, a defined-benefit.
The employing agency has to look to the future. That is hard for government organizations to do. If there is extra money around, it is tempting to start new programs or lower the taxes or whatever.
My employer has recently stopped putting people into the defined-benefit program and started a defined-contribution program. What that does is it puts the responsibility for planning on to the employee, like an IRA or a 401k. The employee has to figure out where to put the money, how much investment risk to take, and whether additional funds need to be set aside to meet the investment goals. New employes go into the IRA-ish program.
I have a good employer. They recently did a review of the pension fund and it is (something like) 95% funded. That means they’ve done a good job of putting the money into the fund that will be needed to pay my retirement. Some government agencies haven’t done such a good job. One you hear about in the news is the City of Chicago where they are underfunding the pension plan to the tune of 45% of projected future obligations.
So what happens in Chicago 20 years from now if they don’t have the money to pay the pensions that they promised to pay? The city could go bankrupt and attempt to dodge the responsibility of paying. Or they could raise the money through taxes and fees and other ways that governments raise money… meaning, they take the money from somebody and give it to the retired folks. After all, that was the deal when they were employees, that they would eventually get that pension money. They may have given up the opportunity to get a higher wage somewhere else because they wanted a stable promise of future payments.
It’s going to be interesting to see what happens.