How far into the future do these pensions have to measure unfunded benefits?
I'll state up front that I'm neither an actuary nor am I a pension expert. HOWEVER, the problem is apparent.
Pension funds fall into one of two categories --
a) Defined Benefit -- where the contribution rate is left as a function of the amount of benefits to be paid; or
b) Defined Contribution -- where the benefits to be derived at a future date are determined as a function of the contributions that have been made.
The problem with SS is that it is "none of the above" -- Congress, in its wisdom, has defined both the benefit and the contribution, with the only remaining variable being the net increase or decrease in the fund liability (i.e., the "deficit").
By law, certain benefits have to be paid; by law, the amount of the contribution is fixed.
To answer your original question, however, when you compute the unfunded pension liability, you must establish what the benefit-year payouts will be for each subsequent year for ALL employees currently earning benefits, then discount those at an appropriate rate such that, considering growth in the fund, the appropriate dollar amounts will be available when the benefits are required to be paid. But the calculation must also take into account the varying gross contribution amounts from year to year, as well as the earnings potential those amounts have going forward.
So, it isn't just picking some arbitrary period of time, but it must include ALL benefits that can reasonably be anticipated to be due in future years. Of course, those benefits in the distant years (e.g., 50 years off) are heavily discounted, and at some point, become relatively unimportant in the current year computation. Similarly, the contributions for far off future years are discounted.
"Unfunded Pension Liability" is a specific term that refers to the discounted sum of future benefit payouts for which the fund hasn't they money. In SS's case, I don't know what it currently is but is a very huge number. |
