Taxpayers must cover Gov't pension underfunding

Last week I discussed the Budget deficit and my estimate that total Government debt is $4,589 million. Today I want to look at pension fund deficits. 

The first thing to understand is that, ideally, pension funds should be wholly funded. 

This means that if there is a $100 of pension promised, there should be $100 worth of assets to meet that obligation.

This is, in essence, what happens with private pension funds. 

But this is not what happens with Government pension funds.

In the words of the international magazine The Economist, “public sector pension schemes are generally exempt from the same accounting and regulatory pressures as their private sector counterparts”.

Pension funds deal with the future and the future is uncertain.

They grapple with such problems as how long will people live, what will be the return on the assets, what will be the rate of inflation and so on.

An actuarial report is prepared on a regular basis for each fund to determine, among other things, how much should be paid into the fund by members and by Government in order to keep it solvent.

Ideally, the funding ratio should be 100 per cent.

Unfunded pension obligations are a Government debt and if they are not fully provided for now, they will have to be paid for in the future.

A failure to do so means we are putting the debt on the shoulders of young people, even people who are not yet born, and this is immoral and wrong — although that does not seem to worry our politicians unduly.

After all, they might be dead or out of office when things can no longer be hidden.

Incompetent

The youth of Bermuda has a mountain of debt to climb and no way to get to the top.

An example of a dishonest and incompetent government being caught out occurred in a small town called Prichard in the State of Alabama. 

The town pension fund ran out of money in 2009 and those dependent on pensions were cut off. 

One pensioner, a retired fire marshal, was found dead in his house and the water and electricity had been cut off. 

There are other horror stories from the U.S.

New Jersey debts were featured on 60 minutes; Illinois is on the brink of insolvency; Vallejo, California, is broke and lives from day to day. 

A former San Diego (nicknamed Enron on the sea) city official stated that: “Prichard is the future. We’re all on the same conveyor belt. Prichard is just a little further down the road.”

When pension fund money runs out, misery and turmoil result.

Is Bermuda in a similar position?

Let us look at Government pension funds.

Remember these are not private pension funds that are obligated under law to operate in an honest and transparent way, and do so.

Those who have a private pension are normally protected under the law. 

I want to focus on three Bermuda Government pension funds — the MPs pension fund, the civil service pension fund and the social security pension fund.

The good news is that there are not too many members.

The bad news is that these members have a pension that is much more generous than that given to seniors or civil servants.

There is only $8 million owing, so everyone will be relieved to know that Ministers and Members of Parliament will not have to worry about their pension cheques.

The civil service pension fund includes police officers, fire fighters, teachers and nurses as well as civil servants.

Taxpayers have an obligation to meet that deficit or else our public servants will not get the entire pension they are entitled to.

The boys on the hill promised that the public servants would be taken care of in their old age — and the time is near when many mature civil servants will have call in that promise.

If I was a public servant dependent on a Government pension I would be worried out of my mind. 

The social security pension fund is compulsory for everyone working in Bermuda.

A pension is paid when you reach 65 and continues, with cost of living adjustments, until you or your spouse dies. 

For many people, this is the only income they will receive when they retire.

This fund is 29 per cent funded, which means there are insufficient assets to meet the obligations to the members — everyone aged 65 or older in Bermuda. 

Obligations

Government promises 100 per cent but there is only 29 per cent in the pot.

Prichard Alabama was 33 per cent funded just before it collapsed. 

That someone is the taxpayer — those younger than 65 and still working.

What happens if youngsters cannot pay the debt involved — of $2,831 million — because they have their own obligations, such as mortgages, credit card debt or their children’s school fees?

The short answer is too bad. Government has a police force and a regiment to enforce its laws.

But when the majority of young working voters perceive that there is an inescapable choice between handouts to old retirees and the future of their families, they are going to vote away handouts to oldsters like myself.