Pros And Cons Of Underfunded Pension

Abstract
The economic recession since 2008 have left many public organizations in the US with extraordinary budgetary difficulties; and underfunded pension/OPEB (Other Post-Employment Benefits) play a critical role leading to that trouble. For the state employers who sponsor OPEB, under-budgeting problem arises for several reasons. First, the current accounting practice is that they account for these costs on pay-as-you-go basis, meaning the expenses are paid out as incurred. Even though GASB requires OPEB liability disclosure in the financial statement, the employer could be in large deficit no pre-funding was set up to offset OPEB liability, especially at the time when retirees begin to draw these benefit. Second, according to many state
From the employer the perspective, change in employees’ contribution may help ease part of the burden; however, since many state employers are in large deficit for their pension plan, the additional contribution from employees may go directly toward pension fund before it goes to OPEB funding (pension certainly takes higher priority over post-retirement benefits) . From the employees’ perspective, even though they might see the reduction in current paycheck, increase in retirement contribution could generate tax benefit and secured the well-being after retirement if the employer sponsors OPEB. We believe that reaction from employees will most likely be favorable. From the legislature viewpoints, is this change beneficial when sacrificing tax revenue at current time (employees’ contribution to retirement is tax-exempt) to offset pension deficit? The answer depends on the economy and what the current needs are. If the economy is thriving and the state could potentially acquire tax revenue from sources other than individual income tax, then this solution will be feasible. Legislators needs discuss how to allocate tax revenues and expenses based on the current
Employees: They may feel secure if there is a fund for their retirement benefits; and thus do not have to pay for health insurance out of pocket when retirement comes.
2. Employers could potentially save tax money by being able to deduct the contribution to the other post retirement plan. Meanwhile, they need to invest money to those plans. Under current situation, which most of states’ pension plans are underfunded, most state don’t want to and may not be able to fund other post retirement pension plan. It will increase their financial burden.
3. Legislators: In order to give state or local entities tax benefit by allowing them to accrue those expenses and take a deduction, legislators need to modify many codes. For example, in Code Sec. 461(h)(1), no accrual can be made where the liability has not actually been incurred; is contingent upon an uncertain future event; is contested and not paid. However, our suggestion doesn’t meet all those requirements. The other post-retirement benefit cost is minimal but estimated cost and technically speaking it is not an exact liability. Therefore, we can see the difficulty in making it come true. There will be a lot discussion upon this