Personal Financial Planning - Coursework Example

Title: Name: Institution: Date: It has been shown clearly that the public sector pension’s schemes are becoming unfavorable with the increasing costs which are basically getting out of hand. It has created strains at a particularly very opportune time for both the public sectors and the local governments and more seriously to the individuals. “Pensions are one basic means of financial support in the old age accounting from all social protections expenditure” (Brainard 2006). At the turn of the century, the US public pension funds faced a perfect hurdle that was caused by the unfavorable logistics in terms of the demographics of the populations, the interest rates that have highly contributed to the increased present values of the liabilities, the decline in the investment returns that arise from the stock market and more especially the rising ranks of the pensions benefit claimants. “It has been estimated that the population growth is anticipated to increase from about one million to about 60 million in the next thirty years to come” (Copeland, 2005). This as well correlates to the increased aging population as there are more birth rates and less death due to the improved health care in all nations including the US. Evidently, health care is the number one docket that receives most of the Government funding and thus the reduced death rate and more of the birth rates (Brainard 2006). The spending rate by the government has been the biggest concern especially due to the recent unexpected relatively mild recession that has had serious impacts on the tax revenues. This has more strongly impacted on the spending side of the government’s equation. A much larger chunk of the money collected from the revenues is being dedicated to expenditures such as the health care and the elementary and the secondary education. This leaves little money that can be used for the more beneficial government services. The issues of the pension schemes heighten this problem since the people are protected by the law by the non impairment clauses which guarantee each individual a payout regardless of the conditions that the government may find itself in at that particular time. Raising taxes has been a solution to most of this problems and cutting down on the spending on most o n most of the other programmer so as to meet the pension requirements for the people. The government has as well also to the cost of the post employment retiree health care cost The estimates for the aggregate of the unfunded amount of the money required according to the actuarial liabilities as computed indicate that an excess of the assets. The pensions for the State and the local government range at an approximate value of $200 billion to an estimated $700 billion. The statistics however indicate that the pension estimates are always imprecise and sometimes very controversial. This is because the estimates are bound to certain changes such as the changes in the interest rates and the investment returns change that are as a result of the demographics of both the future and the current pensions. The appropriate pension actuarial calculations of the funded ratio or the funding balance is as well also related to the fiscal conditions and the economic conditions of the state or locally. The current technique used in calculation of the funded ratio of the pension scheme ids the ratio of the accumulated assets to the current value of the cost of the benefits earned. Lower funding is expected in times of high revenue growth rate. “There are deficits in billions that are a clear indication of the magnitude of the problems facing the public pension systems” (Copeland 2005). It has not been made public that the pensions are adequately funded and positioned to meet the necessary current roles. Another problem that is facing the government is the declining ratio of the active employees to the beneficiary ratio. There are fewer new employees and hence the contribution of the state must increase to meet the current payout demand for the retirees. This is very prevalent especially for the Michigan state where the state employee’s retirement system, the Virginia states retirees system and that of the Milwaukee city and county systems have the annual payments that actually outnumber the active employees in these states. Comparative study shows that ratio of the active employees to the annuitants is 2.24 to 1. Out of the 85 people that were involv3ed in this survey, only 30 had their ratio below 2. This can be amplified further to give the reflection of the whole population of the US. This will therefore translate to five active workers for every one retiree in the current populations. The key driver to the pension liabilities include; the cost of the living which affect the individuals and the state in tandem and other payment escalators. ‘This has been shown to affect the different states differently by the data on how the post retirement pension increases are handled and how the incomes are taxed by the states” (Byrnes, 2006). This by and large affects individuals on their eligibility for the social security benefits. For instance, the annuitants Illinois receive a 3% annual post retirement increase and are exempted from the income taxation by the state. In Indiana as well, the annual increases as granted by the legislature of the state are on ad hoc basis and their benefits are taxable by the state. Iowa State on the other hand has benefits caped at a constant 3% but the benefits are subject to an increase by excess earnings of the pension amount. This has never been easy for the state to control as the pension plans are funded by both the employee and the employers contributions. The money has as well been invested and this has seemed to provide the bulk of the annual income. The annual employee contributions are also often varying from one year to another. The is contributed by the levels of contributions hat simply determine whether the employees are eligible for the social security benefits, despite this measures, the government employees are always continuously participating in the social security. Because all the state and the local county pensions are funded investments, the investment accountability is often a very critical issue with regards to meeting the expected actuarial solvency. It is not surprising that even with this current position. 8% of the pension fund is always an assumed rate. Brainard (2006) has indicated that there is an increasing demand on pension that has thus driven the heavily sought pension fund into investment into equities. There is no doubt that the US holdings in equities make up one of the largest share portfolios with a median of about 44% of assets. “When it simply gets to this level where the public funds seek higher returns for their cost, the funds should be invested in the private equity and real estate” (Coronado, Eric, & Brian 2003). This pension fund by the state has actually brought about a very big problem on whether funding need to done by the state or justifiably by the contribution of an individual to his pension at post retirement. This has as usual elicited many reactions and the government seems to be making moves towards enabling the individual employees to be contributing their own pension that will be considered adequate at the time of retirement (Coronado, Eric, & Brian 2003). The following strategies can be considered in order to close this gap. It has widely been understood that the pensions are benefits that are accrued over time the employees are offering service to the employer. It has been on this basis that even a slight consideration of reducing or cutting down of the pension benefits illegal. This has as well been made even harder for restructuring by the several clauses found in the legislature. It is however very possible to restructure the benefits for the future employees but the restructuring f the future employees are very highly restricted. Local government can however be declared bankrupt and in return can be able to restructure the pension benefits, but this will be on an extreme case as illustrated by the bankruptcy code of chapter 9. This also indicates that the government has very limited options to pursue to reduce the pension benefits. Other strategies need to be thus considered in a rational way so as to ensure the pension solvency. Such way includes reducing the administrative expenses and the investment costs. It must as well b noted that investment opportunities for such huge amounts of money are also not available. ‘The private plans are also just in some way similar to the public pension plans” (Coronado, Eric & Brian, 2003). Even with the reduction of the administrative cost, it has very little opportunity to improve the current crises of the rising demand on the pension fund. The only available solution in the offing will be to raise the tax in order to meet the pension obligations. Statistics have indicated that 3.7% of the tax was the state funded tax revenue while 5.5 accounts for the local tax revenue (Coronado, Eric & Brian 2003). There is also an increase in the competition in expenditures the funding by the health care and elementary and the secondary education by which the pension funds will find itself unable to compete with this public function. It is thus not surprising that the government will find itself pressured and will thus need to seek other investment procedures. Pensions bonds can as well be explored but to achieve this, the government will need to determine the unfunded amount of the pension and then make a decision on how the liability could be cleared through the proceed from the bonds. ‘This proceed will be deposited in the pension funds and invested for more money” (Byrnes & Christopher, 2005). The wider the margin between the investment returns and the interest rates on the bonds, the higher the returns that will be accrued in this system. There is also a risk in this strategy because, when the new investment will go down, the whole strategy goes bad. The pension bonds are often not exempted from the tax reducing the attractiveness to some investors. But since the state government backs the pension bonds are backed by the issuing government, they limit the state’s ability to issue other forms of debt (Coronado, Eric, & Brian 2003). In conclusion, there is a big problem in the pension funds and the biggest debate that is whether the government should fund or whether they should be contributed by the employer and the employee. The current state pensions have not been designed to meet changing conditions. Pension’s plans are a function of many contributing factors such as the contribution levels, government health and the nature of the governance. The management in most cases is in efficient and real actuarial are required contributions were made regularly. It is also very evident that there are very few options other than finding additional sources of revenue. New methods of contributions plans need to be explored based on the current economic growth and future pension system. References Brainard, K 2006. Public Fund Survey, summary of findings for FY2005. National Association of State Retirement Administrators, report, September. Byrnes, N 2006. Pensions: Hedging bets in Harrisburg. BusinessWeek. www.businessweek.com/print/magazine/content/ 06_06/b3970103.htm?chan=g1. Retrieved on 24th January 2012. Byrnes, N., Christopher, P 2005. Sinkhole! BusinessWeek. www.businessweek.com/magazine/content/05_24/b3937081.htm. Retrieved on 24th January 2012. Copeland, C 2005. Employee tenure: Stable overall, but male and female trends differ. EBRI Notes, Vol. 26, No. 3, March, pp. 2-10 www.ebri.org/pdf/notespdf/0305notes.pdf. Coronado, J., Eric, & Brian, K 2003. Public funds and private capital markets: The investment practices and performance of state and local pension funds. National Tax Journal. Vol. 56. No. 3. Read More