The problem with “guarantees”
I recently attended a Rotary meeting in Coronado, California and the guest speaker was an a attorney from the City of San Diego. The city of San Diego has a deficit of over one billion dollars in its' employee pension system. Recently the governor of California has attempted to address the problem with the State of California pension system which is underfunded and facing a future deficit. Several articles have come out describing the hugh underfunded deficit that General Motors has with its employee defined benefit and health care obligations. These institutions all share one common characteristic. They have promised guaranteed future income streams to their participants. This is like living in fantasy land and finally, the problem has hit home. A partial answer to these unfunded pension liabilities is to total up the dollars in the defined benefit plans and distribute the funds to each employee within a defined contribution Plan or 401(K) type plan. The employee then knows what he or she has for retirement and then continue to add to their holdings with some type of match from the particular institution. I would rather have a known sum now than find out that the empty promises cannot be met. Union demands have caused an unrealistic scenario to take place and steps must be taken to get the above institutions on a better foundation. Politicians have to make hard choices and stop catering to the emotional and uneducated masses of people that think a “free lunch” is their God-given right. The social security problem is similiar in that the unfunded liability is unlimited and cannot be calculated. Plus, there is no contractual obligation that the government is providing, but is based on trust only. The monies that you pay for your future social security benefits do not go into a cash fund and is not actuarily calculated. The above mentioned institutions at least are sttempting to fund their defined benefit plans but cannot find the dollars to properly do it. The old adage about “biting the bullet’ is upon us. Let’s get our “heads out of the sand” and convert these underfunded plans to defined contributions plans before it is too late. Personal accounts for Social Security are also a way out of the problem but the mis-information in the press is not helping the program to permit these type of accounts for younger workers.
Gary E. Marsella