Question

A fully funded pension system hurts all consumers and savers”. Determine whether this sentence is true, false, or uncertain (maximum 2 double spaced pages).

Answer 1

In order to determine whether this statement is true, false or uncertain ,we need to understand what is fully-funded pension system and under-funded pension system.

Fully-funded pension system are that type of pension system which has enough assets to give all the promised benefits. These type of pension system are generally applied by those firms which have financial stability and no budget or capital crisis. In this system, an employee pays nothing into the pension plan during his/her working tenure with the firm. No amount is deducted from an employee's salary for contribution towards his retirement plan. The money is transferred in account of the employee depending upon the tenure of work with that firm. The more you work with the firm having system of fully-funded pensions, the more you get after retirement.

Under-funded pension system are those type of pension system which has not enough assets to meet its promised obligations of retirement of employees. In this system, an employee has to pay some part of their salary as contribution to their retirement plan. These system are applied by those firms which have capital or budget problems.

The above stated statement is uncertain by my knowledge as fully funded pension system is generally preferred by consumers and savers as the consumers and savers would like to pay nothing and still reap the benefits of retirement which will be paid by the firm they are working with but an under-funded pension system also has its own advantage as it helps in tax savings as it is an expense for an employee which helps in savings tax. If the under-funded pension system covers and meets all its promised benefits, there's no harm in opting for under-funded pension system. The stress of periodic payments can be utlized for tax savings and can be reduced over time and with constant , effective monitoring , the stress can be reduced. Hence, the statement is uncertain and fully funded pension hurts certain category of consumers and savers which are looking for tax savings meanwhile it benefits who are willing to pay nothing for their pension and wants to reap benefits of retirement pension.