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Pensions and post employment benefits comprise significant source of income for retirees. Employers as well as the government invest a lot of money into pension plans over the course of the people’s employment to fund their future pension and schemes of their post employment benefits. Public employees are supposed receive strictly defined benefits and a guaranteed amount of pension regardless of the state of the economy or return to the original investment. The fiscal health of local governments sometimes does not have the capacity to make complete payment of pensions and post employment benefits. The greatest non debt amounts that governments owe to people are related to health insurance, post employment benefits and other benefits for employees. Having worked as public employees for a long period of time, they are paid when they retire or when they leave the government’s pay roll (Levine, 2005). The aim of this essay is to describe and prove that local governments underfund post employment benefits and pension schemes. In addition, the factors and processes that are affecting provision of pension and post employment benefits are thoroughly analyzed. This essay further examines complications associated with increased number of cases of late provision of the post employment benefits for retirees.
Understanding Pension and Post Employment Benefits
A pension benefit plan is a contract that usually defines a fixed amount of compensation that should be paid to a person after his/her retirement. Employers adopt pension plans to provide benefits for their employees. Pension plans often include additional aspects, such as insurance. Inclusion of the insurance to the pension plan establishes survivors who receive benefits in case of death of the major beneficiary (employee). It is not easy to determine the cost of a defined befit plan. It is usually estimated with the help of the actuarial software use. Sometimes, employers do not use the software when allocating pension and post employment benefits. This often results in serious underpayment to the retired employees by the government. Those employers that do not rely on the actuarial calculations often allocate resources for their employees’ post employment benefits based on the financial and economic assumptions. The scope of these assumptions includes consideration of the additional levies or taxes, the average retirement age of employees and returns to be earned by the pension plans investment. Post employment benefits may also include health protection provided by the government. Moreover, the government or private employers finance retiree’s medication every time they get sick. Hence, in order to understand the issues surrounding pension plans and post employment benefits it is crucial to access the reasons why these two plans are often underfunded by local governments (Vlasic, 2008).
Understanding Post Employment Benefits
When employees work in the government or private organizations, they receive compensation in the form of salaries or health insurance benefits. The post employment benefits are usually in two groups of benefits: pension and other post employment benefits. These benefits also include health insurance plan, prescription, and other benefits that are usually eligible to retirees. In some cases, this scheme also includes the option of life insurance with the identification of survivors in the pension plan.
In an attempt to understand post employment benefit schemes, it is vital to evaluate capacity of local governments in fulfilling their obligations for their former employees with respect to the pension plans. Concerning the pension plan payments, a large number of institutions have more liabilities than assets to cover those financial obligations. Therefore, it is necessary for governments and employers to consider investing more on the expansion of their assets to fulfill their obligations in the form of pension plans and other forms of post employment benefits like health insurance policies.
There is evidence that a lot of employees underfund their post employment benefits and pension plans. Considering the actuarial processes that are involved in the establishment of the funds to be disbursed for pension plans, it should me mentioned that almost of them entail the use of numerous assumptions, and sometimes even arguments that are based on vague generalities. In addition, unscrupulous employers sometimes underfund pension and post employment benefits so that they reduce the cost of funds used to fund these projects. However, given the fact making decision about funds allocation to the pension plans and post-employment benefits are legal rights of citizens it is unfair if this right is violated. Moreover, actuarial audits conducted in these projects should involve sophisticated means of coming up with the funds that should be raised to finance these projects. Well prepared computer programs perhaps may solve this predicament. When a computer program that incorporates all necessary considerations is developed, it is possible to calculate the exact premiums of pension and post employment benefit plans (McCracken, 2007). The computer program that should be created to rectify this information should include factors such as the tax rates, the age of retiree, the benefits that employees expect from the benefits plan and the sources of capital to fund the schemes. With the use of computer programs to perform actuarial audits, there would be a standardized calculation of the funds the government should raise in order to come up with highly effective pension plans. For governments to be in a position to pay post employment benefits on time without under paying them, it is essential to understand the issue of post employment benefit information management.
Legal Course when Benefits are Underpaid by Employers
The employment act of 1974 is the legal instrument that has been developed for the retirees whenever their pension plans are denied or whenever other post employment benefits are underfunded. For example, some employees who consider reducing the amount of funds to finance their post employment benefits such as health may use this legislative act in the court with an argument to protection themselves against possible oppression. This legislation is commonly known as ERISA. This federal law regulates employer provided pension plans to protect employees from under payment. This tool also ensures that employers are eligible for the plans they agree with retirees. It reduces the chances of breach of contract to zero apart from cases in which there are corrupt officials in the justice system. For these reasons retirees suffering underpayments should contact their attorneys because this is a constitutional right (Schieber, 2004). This act stipulates that every benefit plan should have procedures for review at the knowledge of retirees.
Measuring of Post Employment Benefits Cost Obligations and Actuarial Valuations
An actuarial valuation is a largely complicated process during which certain factors are considered to come up with a sensible equation that would provide evaluation of the amount of money that should be allocated to retirees. This evaluation is necessary to avoid underfunding of pension and post employment projects. Governments consider several factors during their calculation of the value of post employment benefits and pension schemes. However, there are several milestones that are associated with the procedure of the actuarial calculations. This could be a reason why retirees are still made to suffer underpayments even though they had invested appropriately in the post employment benefit plans during the days of employment. The government follows certain steps and procedures to establish the amount of money they should use to fund pension and post employment benefits. The government uses historical experience and their assumptions about salary amounts, rate of increase, number of years of service for employees, life expectancy and the number of covered employees (Treuil, 1981). These factors are usually considered in an attempt by the government to project the future cash flow. However, in the course of case flow forecasting, there is a likelihood of miscalculation or erroneous exercises taking place. As a result, miscalculations that occur during this stage of the governments’ and private employees’ establishing and measuring the post employment benefits cost and obligations, may cause severe under payment. Actuarial evaluations have complex procedures, therefore, governments and other private employers should consider hiring skilled labor force. The experts would lead to less under funding of retirees considering that they have better levels of competence than ordinary accountants.
Depending on the expected rates of return on the assets of the pension and post employment benefits plan, the government then considers discounting the projected cash flows. If the estimation of the projected cash flow is erroneous, the same error could be reflected in the discounting of the projected cash flow (Plante, 2012). As a result, retired employees face numerous risks associated with the possibility of their post-employment benefits underpayment, including poor discounting of the cash flows.
Information necessary in Actuarial Valuation
To avoid underpaying of pensions and post employment benefits, governments should conduct valuations of the financial reports from various institutions. Information that is needed to perform effective actuarial valuation comes from different sources. The reports provided by the employers to the government vary enormously. These financial reports are usually coming from different places. However, local governments and other employers in the corporate sectors do not exhaustively analyze these reports. This creates possible loopholes for underpayment of funds that are needed to cover post employment benefit plans for the retirees. A possible remedy to this challenge is storing information in safe places. In fact, it can be recommended that the local governments should invest some resources in different information technology projects that would facilitate storage of the information and financial reports required in actuarial audits.
Information such as the life expectancy, the amount of money invested by the retirees as their savings for retirement plans and the age of retirees should be kept in safe custody. Personal characteristics of the beneficiaries of these retirement benefits should also be taken into account. All the information related to allocation of pension plans and post employment benefits should be stored in the databases for convenient and effective use. Once this information is in safe custody, this would enhance the availability of clear documented evidence about the facts that should be considered when allocating funds by the governments. Therefore, allocation investments into computing ventures will secure all the information to be available for the users at any time.
The Future of Pension and Post Employment Benefits
Pension benefits and operation benefit plans pose a serious risk to the fiscal health of the federal government. For this reason, it is vital to incorporate some changes so that the government remains at a state of economic stability while still not oppressing its employees. The uncertainty in the financial market, the aging of labor force, high health care costs and the increasing rates of life expectancy are the factors associated with economic strain of the federal government and especially in the cooperate sector. With a series of increased unpaid debts of governments to the financial benefit plans, the government will have to incur the expenses itself to cover the underfunded liabilities (Sasseville, 1995). Considering the changing economic environment, implementation of reforms to control the provision of the post-employment benefits and pension will require a lot of financial resources from the government.
To avoid underpayments of pension and post employment benefits, it is necessary to examine the issues surrounding post employment benefit information. In addition, there is also a need for a special scrutiny of the government’s role in the schemes. First and foremost, governments should not have the choice about the methods used in the resource allocation. In fact, it is recommended for governments and employers to use “age normal” as the method of allocation. This ensures that employers do not choose the methods that are financially friendly to them while still mistreating retired employees.
Pension benefit schemes and plans that are earned by retired employees that are not related to investments should be included in the financial reports showing the expenses of each year when they take place. In addition, changes in the pension and post employment benefit plans should be implemented immediately and not after thirty years (Dean, 1989). This would help the retirees to avoid under payment in the sense that pension plan terms would take immediate effect after their retirement. Employers have used this in the past to buy time before paying pension benefits plans, excluding profit and interests rates from the base of the compensations’ calculations.
Evidence of numerous research studies indicate that population in the United Stets is currently in the process of expansion. However, even with the growing population size in the country, the status of post employment health benefits and pension is still precarious. Given the increase of premiums, benefits and pension plans are cut and even terminated in both the private and the public sector. Public and private institutions may consider revising their oppressive terms and conditions which are extremely unfair to the retired employees. This problem requires additional attention from the policymakers. In fact, President Barak Obama has recently declared that pension, post employment benefits and health care reform are a vital proponent in the economy. He argues that health is not an issue that can be postponed. From the foregoing, it is undisputable that governments underfund post employment benefits and pension of retired workers. Therefore, there is a need to adopt reforms to ensure that the rights of retired employees are honored. It has also helped to establish a fact that it is necessary to know the availability of these benefits since they are a key determinant of the financial security of retirees and the time of retirement.