Research Focus

The goal of this research is to conduct a study on state and local government public pensions by investigating how pensions affect government expenditure, funding, and returns on investments made to pay the same. The research topics for this study are: How do local and state government public pensions affect federal state budgeting? How does the Local Plan funding process work?

The topic is based on State and Local Government Pensions, which are important because of the large impact they have on the growth of any state. It is evident that funding of the local pensions is one of the aspects considered to help in growth and development of states. Hence there is need to study the processes involved and impact the funding has on the budgeting of the country.

Arrangement of the Paper

This assignment is arranged in different parts, where the discussion and analysis are based. The paper will discuss the general issues about the state and local government public pensions, the funding of these pension, their impact on the budget, the returns on investment, and the retirement system. Finally, the research will conclude with a summary of the findings. These parts of the paper will be the specific headings through which the discussion and findings are based on.

State and Local Government Public Pensions

The public pensions are the sum of funds which employees save into during their years of working and have access to after their retirement period, which is supposed to provide support during the period in which the individual is not working anymore. According to Boyd, Donald and Yin (77), the pension is defined to be a definite plan with which a regularly fixed sum of funds is to be deposited or paid directly to a given party, under which the sum of the invested funds is available to the investing party during their retirement age. In this regard, there are different types of pensions which the government may opt to provide to the state locals. The public pension plan is important to people who may opt to have sources of funding for their future after their employment funds are unable to cater for their needs, or when these persons do not have the ability and expertise to obtain money due to their retirement age.

One of the pensions is the employment-based pension, which is a retirement plan that is directed to provide the workers with an income during their retirement period, or when these individuals are unable to earn a steady income from their employment. This type of pension is available to the workers of the government especially the military veterans. As such, the workers will have to ensure they pay some specific amount of funds to the local and state government for their pension savings which they will use for their retirement plan. The other type of pension is the state and social pension, which is a funding system designed for the residents and citizens of specific countries to obtain income during their retirement period (Wang, Qiushi, and Peng 77). These findings are similar to the employment-based pensions, but the contribution done to provide the retirement money is tax-funded. Examples of these pensions are inclusive of the Basic Retirement Pension of Mauritius and the New Zealand Superannuation. The final form of pensions is the disability pension, which is a plan set aside to provide the members of any given form of disability the income and support during their retirement period (Boyd, Donald, and Yin 79). However, the plan may be set to support the party even before their retirement age, even though the calculation of the funds may be similar to the other for the parties involved.

According to Wang, Qiushi, and Jun Peng (77), over the recent years, the state and local pensions have raised significant concerns on the significant investments made to the same. It is possible that the funds raised to compensate the pensions paid to the individuals in later ages may not be enough compared to the funds that are actually paid to the retired persons as their return benefits. There is an issue concerning the small contribution of people during their working periods and the great recession that has resulted in significant investment losses. According to Ting et al. (1909), the United States has seen over $800 Billion being underfunded by practices of the reduced contribution of individuals. The issue brings about the need to have a deeper understanding of how the public pensions are funded and the effectiveness of these practices. The examination of the effectiveness of the funding process is necessary to ensure the funding plan for the pensions is effective and efficient.

Funding of the Local Pension Plans

Based on the historical practices, the government pensions were funded over the pay-as-you-go practice, such that the workers were set to pay for the pensions during their working period as they earn (Boyd, Donald J., and Yimeng Yin 98). However, between the 1970s and the 1980s. The funding of the pensions was transformed to be refunded due to some pension plans have failed, hence the passing of the Employment Retirement Income Security Act (Wang, Qiushi, and Peng 78). On the current settings, both the state and local governments follow the standard accounting procedures to develop the pension funding systems that were set by the Government Accounting Standard Board. According to Andonov, Aleksandar, Bauer and Cremers (279), it is a requirement that the pensions’ plans retain the actuaries be retained for projects with future assets and examine the liabilities as based on the economic and demographic perspectives. As such, these actuaries are tasked with the calculation of the contribution of the employers in covering the liabilities that may be incurred by their workers and any extra amount needed to cover their past underfunded plans.

It is evident from Boyd, Donald J., and Yimeng Yin (99) that the pensions receive funding from various annual investments of the workers rather than the previous approaches where contributions were made. Statistics from 2013 indicate that the investment earnings covered at least 71% of the total revenue for the pension plans, 20% of the same from the contributions of the employing parties, and about 8% from the contributions made by the employees themselves (Samuel et al. 590). The values are significant to show that the most efficient approach towards raising funds is the investment earnings, which is based on practices such as investing in stock markets and obtaining the returns back, which benefit the retiring party. Moreover, there are benefits that the state and local governments get with the profits realized over the investments made by the pension funds, hence development of the governmental size.

It is important to note that there are risks and benefits that are realized through the process of funding the pension plans. The funding practice, however, has significant risks attributed to the same. For instance, the investment becomes riskier compared to the integration of the fixed-income assets, United States Treasury bonds, corporate bonds, and federal agency securities. However, the benefits realized after the investment process is beneficial to the government and the retiring party. As such, the approach is effective and benefits the retiring parties since they are funded with enough money to support their overall life and dependents over a long period.

Employee Contribution

The United States requires that the public employees to contribute towards the pensions, which is about 5% of their payment. However, for the retirement benefit plan, it is required that these individuals will contribute through a savings program and hence publicly fund their pensions. As such, the pay of the workers is cut off to support the funding of the pensions. It is important that individuals ensure to provide the required funds to the pension plans during their working years as it provides them with the opportunity to improve their overall lifestyle and compensation for some of their life practices. Moreover, it is an important approach as an investment in one’s future and sustainability of the same.

Employer Contributions

The employers are required and guided by the local and state policies on how they will contribute to the funding of the pensions through the Annual Required Contribution (ARC). According to Peter (72), the payment of these funds occurs annually, and it amounts to almost 90% of the total pensions paid to the state and local governments. The employers are mandated with the chance of ensuring the workers have a lifetime investment that will benefit them in future endeavors. As such, it is important for these individuals to ensure proper contribution towards the pension plans for the individuals employed by this employer.

Social Security Coverage

Instead of social securities, most of the employees make their payments to the retirement plans to the local and state governments. As such, the funds are directed to the section for the need of having proper investments in life practices hence proper and sustainable future.

Investments and Other Parts of the Financing Equation

Among the massive amounts of funding to public pensions comes from the investment earnings, which are responsible for providing revenue and determining the costs of pensions. According to Rozanov, Andrew (275), factors such as the rate of workers retirement, wage inflation, mortality, and attrition affect the overall expectations of the pensions received. These factors are important to note during the process of providing the workers who have retired with their overlap funds and investing with the current funds into other markets. As such, with the economic aspects in mind, it becomes paramount that investments are made during the periods in which they can return high-profit margins as opposed to periods when the returns on investment are limited (Van Nieuwerburgh, Stanton and Bever, Richard Stanton, and Bever 88). As such, they are to be highly considered and placed into the perspective of practice for proper outcomes.

Some practices by the government and managers from companies influence how the funding of pension occurs. However, the economic and socio-demographic factors are also attributed to the same (Peter 72). The demographic structure of the population is known to have an impact on the overall pension funds. For instance, it is considered that the dependency ratio affects the overall funding of the public pensions. According to Wang, Yong, and Mao (140), it becomes essential that the issues caused by the social-economic factors be addressed through the design of an economic measure. Moreover, the economic factors are essential for consideration in ensuring the state and local public pensions are appropriately funded. Factors such as inflation and performance reserves are among the essential cases attributed to the development of interest rates when calculating the overall revenue and expenses incurred in pension funding.

Impact of the Pensions on the State and Local Government Budgets

The local and state government is dedicated to ensuring about 9% of their general expenditure is directed to the employee retirement systems. The purpose of the funds is aimed at supporting the overall pension plans for the retired parties. Without the funds, many of the individuals who retire when their age reaches a certain limit may lack funds to support their future lifestyle if they did not save up during their employment period. Andrew (279) notes that the expenditure is not attributed to the full burden of the pensions received by the state and the local governments, hence does not account for the undefended future liabilities of the workers.

According to Boyd, Donald and Yin (127), the underfunded pensions within the local and state governments vary widely. For instance, the Federal Reserve Board provided that a total of $1.3 trillion, which accounts for about 60% of the funds the government has annually be the number of underfunded liabilities in the state and local governments in 2014. However, the value is contradictory to that of 2013, where the annual revenue and the state funding gap was estimated to be within $800 billion, which amounts to an annual amount of $4 to $4 trillion. The differences in these values stem from the discount rates that are provided during the process of calculating the obligations and future benefits. According to Hartzell, Jay, Sun, and Titman (64), the traditional approaches engaged by the government was to provide discounts on the values of investments and the expected returns. However, there are arguments made by significant economists that the discount rates also increase the overall risks attributed to the liabilities. As such, due to the nature of the pensions to be valued constitutionally, the economists argue that the discounts should be reduced, rather than the high rates of investments previously made.

According to Andrew (287), ever since the enactment of pension systems to reduce the costs, numerous reforms have been developed to help in reducing the benefit levels but increase the age and service requirements, and the increase in the contributions of both the employers and employees in the public pension plans. The pensions which are underfunded may face some pressure from demographic outcomes. As such, the available workers are expected to contribute to the pension funding process and hence support the government in funding the same. Across all the nations, it is expected that the ratio of the local and state contributors be almost similar to ensure the government’s budget is not profoundly affected.

Benefits of the Public Pension Plans

The pensions are of vital importance to people and their dependents in a later period in life. It, therefore, becomes imperative that the payment of pensions be essential and is attributed to many benefits for the parties who have the income in their later ages (Andonov, Aleksandar, Eichholtz, and Kok 77). If the pension plans were not available, many people might have returned and failed to obtain financial stability at their age, hence resulting in a number of older individuals who are dependent on other people. Moreover, the overall investments made by local and state governments in the process of holding the funds provided by the individuals would be limited since no funds will be available (Fisher, Lynn M., and David J. Hartzell 333). The availability of these plans, therefore, is of benefit to the local and state governments as well as the individuals who receive benefits as returns on their lifetime investment and savings. There are two approaches with which the benefits can be determined and are inclusive of:

Defined Benefit Plans

In this plan, the pension benefits are derived from a set formula to support the retired party rather than the dependence on their overall investment returns. The different pensions are inclusive of the social securities within the United States. The benefit realized is determined through an appropriate formula which can incorporate various incomes and inputs of the employees inclusive of the age of retirement, years of employment, the pay they receive currently, and other factors which the employee is involved in. With the formula in place, there is assurance that all aspects are taken into consideration, and hence persons who save for longer get higher benefits as compared to those who save for less time. Moreover, the employees who have been saving since they were first employed will have significant value in benefits received as compared to that of the people who only save for a short span over their entire period of employment.

A good example that can be involved is the Times Service Plan Design, which is designed to provide a given amount on a monthly basis. For instance, for a plan that offers a total of $100 every month for a whole year, with 20 years of employment and $3000 for every month, then the Final Average Pay will remain universal and provide the specific benefits to the individuals. With these values, the individual is expected to save funds for the pension for about 20 years before they decide to retire, hence having accrued profits amounting to 20 years of savings based on the formula put in place. As such, it is imperative that the savings period be longer to have more benefits and profits especially because of the large accumulated sum of funds. However, for the United Kingdom, there are practices, known as the Retail Prices Index, which is put in place for the registered pensions plans. As such, the overall benefit is different only to some account, but the benefits received are essential and useful in sustaining the lives of the persons who have already taken the same.

Defined Contribution Plans

The contribution plan is a benefit policy approach whereby the contributions are invested in major markets such the stocks market, and the revenues returned from the investments used to credit the individuals who pay for the pensions (Skancke et al. 250). Upon retirement, the individuals obtain their retirement benefits under either annual provision of the funds or through the monthly distribution of the same. The defined contribution plans are one of the most utilized approaches towards the pension plans for many individuals in the United States (Loon, Jannes and Aalbers 230). This is the most widely used plan globally among many countries due to the ease of obtaining funds and high value of benefits accrued over the period of investment which is beneficial to all the parties.

The risks in investment and rewards are realized by the individual who is to retire but not by the employing party. A number of service providers inclusive of recordkeeping, legal counseling, trustees, administration, auditing, and custodians. These practices are important as they ensure that the people saving their funds are securely accounted for, and the benefits realized by the same are integrated. Moreover, with the advancement in technology, the process is automated and hence reduces major errors that may otherwise affect how the people receive their benefits and the calculation of the same.

Conclusion

The purpose of this research was to undertake a study concerned with the state and local government public pensions and examine how pensions affect the government spending, their funding, and returns on the investments made to fund the same. It is evident that funding of the local pensions is one of the aspects considered to help in growth and development of states. Hence there is need to study the processes involved and impact the funding has on the budgeting of the country. The public pensions are the sum of funds which employees save into during their years of working and have access to after their retirement period, which is supposed to provide support during the period in which the individual is not working anymore. One of the pensions is the employment-based pension, which is a retirement plan that is directed to provide the workers with an income during their retirement period, or when these individuals are unable to earn a steady income from their employment. The other type of pension is the state and social pension, which is a funding system designed for the residents and citizens of specific countries to obtain income during their retirement period. The final form of pensions is the disability pension, which is a plan set aside to provide the members of any given form of disability the income and support during their retirement period. The pensions are of vital importance to people and their dependents in a later period in life. It, therefore, becomes imperative that the payment of pensions be essential and is attributed to many benefits for the parties who have the income in their later ages. With the advancement in technology, the process is automated and hence reduces major errors that may otherwise affect how the people receive their benefits and the calculation of the same

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