Pensions

Pensions Overview
The federal government of the United States does not have an all encompassing pension for its citizens nor do they make it mandatory for organizations to do so either. What it does have is regulatory oversight to private industry who chose to have pensions for their employees. Such regulatory oversight are done by the Employee Retirement Income Security Act that was implemented in 1974 and the Pension Protection Act of 2006. Both acts regulate private industry by establishing minimum standards that must be adhered to when funding pensions.

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal statute that delineates minimum standards for the administration of private industry's pension plans and establishes the impact that federal income taxes will have on transactions associated with management of such pension plans.

The Pension Protection Act of 2006 establishes new funding requirements for defined benefit pensions and includes reforms that will affect cash balance pension plan, defined contribution plans, and deferred compensation plans for executives and highly compensated employees.

While pensions have been around since the early part of the 20th century, inadequate accounting techniques and unfunded liabilities have produced an increase in pension debt. This debt is now an at an unsustainable level, to the point that states, municipalities, and companies are forced to enact drastic pension reform within their individual entities.

Pension debts in general are a liability of general revenues. They are also not a fixed cost, meaning they can fluctuate with movements in the stock market (investments), overall employment, longer life expectancy, accounting (both positive and negative), and assumptions. Pension liability measurement and funding practices are driven by this last piece, assumption. Discount rates, which are derived from investment assumptions, affect how much the state or municipality will contribute. The higher the discount rate (meaning higher returns on investments) will result in a lower contribution from the state or municipality.

Many states and municipalities have agreements with their employees to provide a defined benefit plans. These plans are promises from the government entity to the employee that detail what type of benefits they will receive when they retire. At the same time, the employees do not contribute to their retirement resulting in an ever-increasing unfunded liabilities.

Public Pension Debt: The total state pension debt stands at $1 Trillion USD with many economists and government leaders are saying that the true number of state and municipality pension debt is closer to $3 Trillion USD. The lack of transparency has created a tremendous amount of underfunded liabilities that are not actually notated. Therefore you have the discrepancy between the two numbers. Social Security System is not a traditional pension fund. The system works by taxing workers with that money then being used to support current retirees, survivors and the disabled. There is no general fund that acts as a "pre-fund" that is saved up for future use. If there is any excess money after the payout, it can be invested in non-negotiable securities issued by the National Treasury.
 * Economic success: employers relied heavily on high returns and investments
 * Discount rates: employers contributed less as the returns on investments increased
 * Reliance on Pension Obligation Bonds: this was in hope that the return in investment outweighed the bond coupon payments

Federal governement employees have their own pension fund that was created in 1986 called the Federal Employees Retirement System (FERS), a defined benefit plan. The agency that a federal government employee works under, must contribute 1% of the employees pay for that month. This procedure was enacted by law and protects the employees. However, even this plan has an unfunded liability of $630 billion USD.