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When a state underfunds its pension system, it becomes difficult for it to meet its financial obligations for its retired state employees, possibly necessitating cuts to other important state programs such as education. Created by Sal Khan.
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- What was Rhode Island's U.F. (under funding) percentage? They were in the red as well.(35 votes)
- What would happen to Illinois if they reduce their education funding? Will there be less kids learning, and have worse teachers?(17 votes)
- If education funding is reduced in Illinois (or other areas), there would be some choices about how best to reduce the spending. One thing that would NOT happen is private schools having to charge more as a result, since their funding doesn't depend on the state education budget. What most people don't realize is the amount of administrative overhead involved in the budget. In a private school, typically 90% of tuition is spent on teacher salaries and classroom materials. In public schools, it is not unusual for less than 25% of the total state education budget to go to teacher salaries; the rest is used to run teacher licensing systems, textbook committees, county administration, funding allocation, etc. The obvious choice would to be to reduce or eliminate administrative costs that private schools have shown they can easily live without. Will the politicians make the obvious choice? Who can say...(24 votes)
- How was Wisconsin 100% funded according to the map seen a0:25(6 votes)
- Wisconsin and many other states have worked hard to assure that their pension obligations did not get outstripped by pension funding. Many state legislative bodies have decided that maintaining the integrity of their states' pension system was a fiscal priority. Illinois, unfortunately, has for many years been in the hands of corrupt and/or uncaring politicians. They ALL knew this day was coming, but they would rather get reelected on empty promises than fix this problem. Despite the simpering of Governor Quinn, the solution is actually not unfathomable. You move new hires to a 401(k) (like almost every private company has been forced to do); you go after those with a fraudulently inflated pension (teachers in wealthier districts--you know who you are!); you modestly extend retirement age, and you adjust the payout of teachers who receive more than 65% of their last 5 years average salary AND more than $60K per year.(22 votes)
- At2:37Sal says he is getting about .4% interest on his savings account. Don't you think a numbers guy should shop around for a better rate? I just looked at money-rates.com, and they show Bank X giving out 1.01% (and they are FDIC Insured) Should Sal move his money?(0 votes)
- At3:09Sal mentions inflation. If you are not making at least 2.16% interest (according to inflationdata.com) then you are losing money.(2 votes)
- In the video you discuss the fact that employees under these pension system take lesser wages or less of other benefits and stay longer because they will get a modest pension. Why didn't you mention that these people made payments to the system to earn benefits. I retired after 30 year in an SURS employer and paid 8% of every dollar I earned into the system. This retirement program was not optional, it was mandatory and the money was taken out of your check. Now to say that the state will have to reduce my benefits or not give me the cost of living increases is immoral.(5 votes)
- Why should the state fund pensions? Isn't it the company's fault for having underfunded pensions?(0 votes)
- The state of Illinois isn't totally funding the teacher pension. The Illinois pensions are funded two ways. 1. Teachers/School districts pay in just over 10% of their salaries into the fund. 2. The state also has agreed to pay into the fund. The problem is that even though the state has agreed to put money into the fund, they are not putting in the full amount. I don't know what these amounts are, but it is a very low percentage and this has been going on for many years.
Think about it this way. Say you are funding your child's college education. You tell your son/daughter that they need to put in $3,000/year into the college account. You tell your son/daughter that you will put in $5,000/year into the college account. You child puts in their money every year, but you (the parent) don't full fill your obligation. You only put in $1,000 or $2,000 each year.
Many people think that the teacher retirement is quite good, but they don't realize that teachers don't pay into social security, which means they do not receive a social security pension. The teacher's retirement amount isn't really as good as it looks.(3 votes)
- Can illinois get out of dept with out raising taxes ? i know by cutting, but i dont think they ever will.(3 votes)
- Tough question, to answer your question in simple terms, yes. But its more complicated than it might seem. Without raising taxes there will be no new revenue, and without cutting there will be a widening gap of state expenditures. You have to rely on the economy to boost to increase taxes coming into the state, and even if that happens the people in power really have to have their main focus be reducing the debt. This might mean lose of infrastructure, or other critical improvements to society. Very fragile mess to reduce debt without cutting and raising taxes, it could be done, but it would have to be the main focus for a generation or more.(1 vote)
- My question is, are any of the state pension funds managed by our "too big to fail" brokerage firms, like J.P. Morgan Chase? If not, why? J.P. Morgan has out performed the market since the financial crisis. If we forced them all to take bailout money, why can't we ask them to responsibly manage pensions? After watching these 2 videos on pensions, I searched for 'state pension funding' to try and find out what investments each state is actually making, but in two pages of search results I saw no big brokerage firms listed.(0 votes)
- First of all, if a bank's stock outperforms that doesn't necessarily mean they are really good at managing pension plans. A stock is a measure of the entire firms profitability. Those profits can come from multiple different areas, not just asset management. For example, J.P. Morgan makes a lot of money in investment banking, which has nothing to do with their ability to manage a pension plan.
Also, a pension plan will rarely be managed by one firm. They will usually manage part of it in house and then outsource a lot of it to different asset managers. A pension plan wants to diversify between different markets, strategies and managers. When they outsource part of their portfolio they are looking to get exposure to a specific strategy in a specific market. If they want exposure to the south american corporate bond market, it doesn't really matter where the person works, or how profitable their firm is. What matters is the specific manager and if they can give them the exposure they want.(1 vote)
What would happen to the unfunded liability if in 5 or 10 years science finds a cure for diabetes and/or cancer, heart disease, etc. and retirees start living to 107 instead of 87 ? So instead of an average 22 years paying benefits, they have to pay 42 years!!
Does this mean Defined Benefit Pension plans will become dramatically underfunded all over again - at all levels of government including federal?(1 vote)
- If benefits are promised to you until your death and you live for a very long time, the pension has a larger liability.
It's possible there could be a medical breakthrough that causes a shock to the system and liabilities dramatically increase as people all of a sudden start living a lot longer. What's far more likely is that this happens over a long period of time. If people's lifespans were to dramatically increase, their age of retirement would also dramatically increase. If we start living until 140, it's probably unlikely that we'll work for only half our lives. Working longer decreases the pension liability.(2 votes)
In the last video, we talked about pensions and how they're defined benefit plans and how they could to get underfunded or how there could be temptation for people to underfund them. In this video, I want to make things a little bit more concrete by looking at actual numbers, especially at the state level. So right over here is a map of, obviously, the United States. And what it shows is how funded the pension liabilities are in the different states. So for example-- actually, Texas, for example, 83% of their pension liabilities are funded. They've set aside 83% of the right amount of money to fund their pension obligations, not 100%. It is underfunded, but it's not crazy. California, pretty high, 78%. But one of these states is probably jumping out at you, probably because it has been shaded in red. And that is the state of Illinois, and Illinois is in trouble because it's only funded 45% of its pension obligations. And Illinois really jumps out because it's in red, but there's a lot of states that are pretty close to Illinois. Louisiana, 56%. Oklahoma, 56%. Kentucky, 54%. West Virginia, 58%. And this is an issue because they've set aside, in the past, very little money for the pension obligations that are starting to hit now, especially that you have a retiring baby boomer population. And in order to meet those obligations, those promised obligations, they're going to have to dig into money that was being spent other places, that going in the past when they were underfunding the pension, they were able to fund other things nicely, but not fund the pension and kind of kick the can down the road. But now that the can can't be kicked any further, it's going to have to go the other way around. You're going to have to take money from other things to fund your pensions. And to make it clear, let's focus on the state of Illinois. So this right over here. There's a couple of things going on. In this kind of yellow ochre color-- and I'll circle it in yellow ochre-- they were talking about the total liabilities. And just to make this graph clear, it's not just the yellow ochre part that's total liabilities. The entire height of each of these bars is the total liabilities, and you see how it has just completely blossomed here. And there's a lot of things that go into the total liabilities, the same things that we talked about in the last video. There are things like return on investment. If you are in a low interest rate environment, like we are now-- for example, my money in my savings account, I think, is getting like 0.4% interest. It's getting pretty much no interest. If you're in a low interest rate environment, if you're not getting good returns-- and a lot of pensions tend to go into very safe assets, but those are getting very low returns. You're going to have to set aside more money, and so you see these obligations essentially just growing dramatically. On top of that, you have things like cost of living adjustments. These are attempts at kind of factoring in inflation, how much things are costing in that region. But they are also sometimes negotiated. And sometimes, and especially in the case of Illinois, they've grown faster than the rate of inflation. And so you have these liabilities, and you see that they're getting less and less well funded. So if we go right over here, this is what this green line is, the funding ratio. So how well funded are these liabilities? Say the red part of the bar is the part that is not paid for. And the green is the ratio of the red or is the ratio of what is funded, essentially this higher part. It's the ratio of this part right over here to the entire bar. And you see right over here, Illinois is in a bad situation. Their total liabilities are 138 billion. This is in millions, so it's 138,000 million. So it's 138 billion. This is for one state. And 85 or 86 billion of that is unfunded, that they have to figure out some way to get the money because the right amount of money was not being set aside. And to do that, they're going to have to dig in into other things. So this right over here, this is the pension contribution. Let me circle this. So in this yellow color, once again, this is the pension contribution. And now the state, they're going to have to-- in order to get to a funded position, they're going to make up for all of the underfunding of the past and also the other factors that are making this obligation even larger. They're going to have to dig into other things. So you see right over here in yellow, these are the contributions that they're going to have to make for the pension. And you see that growing. It's growing to in excess by 2018 of $6 billion a year. But what's really fascinating about this graph is it's passing up total education funding in the state. So the cost of funding retirements for people who have already done service for the state but aren't in service to the state right now is going to pass up-- and this is happening very soon-- is going to pass up actual spending on a state-wide basis on education. And at the state level, education is a major, major, major expenditure. So it's going to be passing up a major expenditure, very important expenditure for the future of the state based on past obligations. And to understand where this is going-- and just to understand Illinois' situation, there's 750,000 Illinois-- I don't know how to say this-- Illinoians, Illinoisians, who are members of the state's five pension system. So this is the Teachers Retirement System. This is the State Universities Retirement System. This is the State Employees Retirement System. This is the Judges Retirement System. You see there's a lot fewer judges than that. There's many more teachers who've been retired, many who have been in the state universities. And this right over here is the General Assembly. Very few people who are in the Illinois state assembly. And you can see kind of comparable salaries. This is the retirement benefit, not just the salaries. This is how much on average these folks are getting once they retire on an annual basis. So you see that they're pretty reasonable, especially for the judges, although they are a small fraction. But in all fairness, this was promised to these people. They planned. The probably took lower compensation while they were working with the expectation that they would be able to get these benefits once they retired. They also probably stayed in the jobs longer. This is a way of retaining employees, because they knew that they were going to get this benefit. So you might say, oh, these are really, really great benefits. But at the same time, these people probably sacrificed other things in order to get these benefits now. But it's a very hard question. When you look at this, you say, well, these people, they've done service. They put these expectations. But at the same time, you're like, well, this is really cutting in-- and this is just one thing that I'm showing. It's really cutting into very important areas of investment for the entire state. So the whole reason of really just surfacing this, this whole pension issue, is just to put this in. And hopefully people understand what the issues are, because that's the only way that fairly hard decisions are going to have to be made, decisions on cutting necessary investment or restructuring or who knows what it might be. I don't envy the people who have to make these decisions.