Unanticipated consequences

By William H. Stewart
Economist

FIRST OF TWO PARTS

It doesn’t appear that the central government’s position with respect to honoring its financial obligation to the Retirement Fund by paying the hundreds of millions of dollars it owes is ever going to occur. This failure now results in a projected future shortfall in the Fund‘s eventual long-term commitment for providing payments to both present and future retirees. When that day arrives the sorry situation of “payless paydays” will be a direct result of the central government’s neglect in paying its full financial obligation. Nor does it appear that the Fund’s board of trustees will exercise their fiduciary responsibility and go to court to attempt to resolve this ruinous issue.

The Saipan Tribune recently reported an increase of $40 million in assets at the end of year according to Merrill Lynch, consultants to the Fund. This is certainly commendable. But just think how much more money could have been earned if they had invested some of the money that the government still owes. Also, I can’t help but think that, if the Fund was successful in a lawsuit against the central government, the income resulting from such action would be more impressive than the recent earnings in the market. This observation has got to be more than a matter of one economist’s perspective, don’t you think?

A Jan. 20 article in the Tribune pointed out that the total accrued liability of the Retirement Fund as of October 2003 totaled $902.6 million—close to one billion dollars. The same article indicated that the CNMI government’s unfunded liability with the Fund is now more than one-half billion dollars. With some 8,000 members, that’s equal to $64,625 in the hole for every member. If that’s not impressive enough, picture this: one-half billion in one dollar bills, if laid end to end, would stretch 41,000 miles or one and one-half times around the earth at the equator. Placed end to end, the line would extend from Saipan to the U.S. west coast and back four times. For those that are Harvard graduates the calculations were performed without the effect of wind. As my dear ol’ granny would say: ““Billy, that’s a lot of money.”

There are all sorts of unpleasant consequences that can be expected to occur sometime in the future if the Fund can’t fulfill its obligation to those who depend on receiving their bi-monthly pension. One unfortunate result being the possibility of bankruptcy for those whose only source of income is their retirement check and who have debts they won’t be able to repay. For them bankruptcy may be the only way out. If and when that were to occur, people would lose not only their pension but possibly much more through the court’s liquidation process. Your mother may love you but the auto dealer and the bank does not.

Perhaps there is some wishful thinking within the central government that the U.S. government will step in and bail the Commonwealth government out of the financial hole it has dug. I wouldn’t count on it. Why should the U.S. clean up a mess it had no part in creating? Given the ever increasing need for U.S. financial assistance around the world, I would imagine that the Commonwealth’s financial requirements for “bail-out” money for an abused retirement system would receive little sympathy in congressional appropriation committees. Indeed, a request for funds for such a purpose, if it were to be eventually to be made, might shine a spotlight on other issues that some on the islands might wish could be avoided.

Thus, when not receiving favorable results from their appeal to Congress for direct financial assistance from the U.S. Treasury, the U.S. government and the Department of the Interior, along with the appropriation committees of Congress, should not be surprised when the day arrives when Commonwealth politicos go to Washington with “hat in hand” requesting an increase in food stamp allowances; expanded subsidized rental housing and increased funding to provide for free medical services at the Commonwealth Health Center—to mention only a few charitable programs.

I believe it was sometime in mid-1987 when the 5th legislature passed a resolution opting out of Social Security for government employees who, at the time, were also covered by the CNMI Retirement Fund. Government employees were not given a voice in the matter. The renunciation of coverage was retroactive to January of that year and Social Security taxes withheld were refunded to government employees.

The primary reason being that the many duplicate benefits provided by Social Security and the federal Medicare program would have cost the employee and the NMI government as the “matching” employer contribution substantial amounts of money. So, in an act of self-government, the CNMI chose to create its own program which, as it turns out, can be easily manipulated.

Because the NMI government decided not to participate in the U.S. Social Security system and instead formed its own retirement system, Commonwealth retirees are now particularly vulnerable if conditions in their own retirement program aren’t straightened out—and soon. Under its own system, CNMI financial contributions which should have made to the employee’s retirement program—but haven’t been—must obviously have been used for other purposes, to the detriment of the long-term interests of retirees, present and future. What could these other uses of the money might have been? Stay tuned.

In considering the unanticipated, unintended consequences for neglecting payments to the Retirement Fund, the question must be posed: “What options remain for those charged with the management of the member’s savings?”

To be continued.