The Retirement Fund’s creeping meltdown

[I]Editor’s Note: The following was originally published on July 10, 2001. It is being reprinted here to give readers an idea of how far—or how little—things have changed at the NMI Retirement Fund in the five years since this column first came out.[/I] [B][I]First of a two-part series[/I][/B]

I recall a televised forum several years ago consisting of retired people in the United States who were attempting to convince the U.S. government to make reforms in Social Security retirement and health benefit laws.

These senior citizens referred to themselves as the “Gray Panthers,” not to be confused with the more militant “Black Panthers.” They were the elderly people who had retired after years of work. At one point during a rally, an FBI agent mounted the platform in an attempt to remove a lady speaker from the podium. I can’t recall in detail the incident to curb the woman’s right to free speech, but I do remember her comment to the agent. She said, “Sonny, we are demonstrating for you as well.” Meaning, of course, that the reforms she and others were advocating could one day also benefit the FBI agent and his family.

I thought of this incident when reading about the serious financial condition of the Retirement Fund and the people in the island’s “Gray Panther” community that have retired, many of whom depend on their twice monthly payments for their livelihood. Add to this group the people currently working for the government and contributing a portion of their monthly salary into the Fund for that future time when they may not be able to work because of ill-health or some other reason.

These are the “Young Panthers” of today. Both groups have placed their trust in the government and the Fund’s administration to maintain the financial integrity of the Fund and its assets. I can tell those who have retired, and those hoping to do so some time in the future, that the hard work and diligence of the Fund’s administration and staff displayed in the day-to-day management of their money that they do a good job under difficult circumstances.

Regrettably, I am afraid the same can’t be said of some official within previous administrations as well as some members of the Legislature—past and present—who have permitted the Fund to descend into its present financial condition. Failure to correct this urgent situation can only result in a “meltdown” of the Fund and the future financial security of the members, both present and future.

If you are retired and paying off a home or an improvement loan; making payments to the bank for a vehicle; providing money toward the education of a family member; planning an off-island trip; meeting unusual medical expenses or whatever, you had better pay close attention to your—and I stress the word “your”—money. You entrusted the government and its defined benefit plan for the use of a portion of your paycheck for purposes of investing it in order to earn more money for the Fund, (for your use and those yet to follow). If the government would elect not to pay its monthly contribution to the members with the result that the Fund can’t issue retirement checks to its members, those who have monthly payments to make to, say, a bank, could have their credit rating endangered or at the least downgraded. Those members may not even know about it until the next time they apply for a loan or credit card. If a retirement check is automatically deposited in a bank that also automatically deducts monthly utility charges and the retirement deposit is delayed or not made, you can be in a difficult situation; worse if a household member is ill or handicapped when the financial lights go out.

This serious situation can adversely effect many who are retired, together with widows and widowers of deceased members who depend upon their monthly allotment. Additionally, if the government were to miss paying the retirees, obviously their money would not be available for circulation within the economy and the spin-off multiplier effect that results from their consumption expenditures. Result: people purchase less, businesses have less sales and thus pay less taxes.

Employee contributions paid into the Fund does not—and cannot—lie idle. It must be invested to earn more money. When the government fails to pay its obligation, or when the Legislature fails to allocate money that it has authorized, the retirees, both present and future, are deprived of this money and the interest it could have earned for them.

Fund administrators have been trying for several years to collect from the government what is owed the Fund but has had something less than total success, with only intermittent Band-Aid contributions. Apparently, preservation of the Fund has been, and continues to be, a low priority. Many misinformed politicians and government officials believe the Fund has millions of dollars available. This is not true. The money that the Fund does have must be invested and reinvested for those retiring 10 to 15 years from now for the “Young Panthers” coming along. Presently the Fund operates under the handicap of an unfunded government liability of many millions of dollars. The problem is not with the administration of the Fund and its employees who do a good job, but with the central government’s failure to pay its obligation.

Basically it works like this: for example, a male individual retiring at, say, age 58, should have a continuing normal average life span of 25.9 more years, during which time the Fund will be paying him a bimonthly sum of money.

For a person (male) age 62 and retired, the estimated remaining years of life are 22.5—again the period the Fund will pay a bimonthly allotment to that person. That’s why the money that the Fund does have invested must remain invested and not touched or withdrawn to make up the government’s shortfall. Lifespans differ for women and various ethnicities. Women usually live longer than men.

Money saved (invested) can be thought of as something to rent. A bank loans (rents) money and charges a person interest for its use. The amount of interest charged must also cover the loss of its value as a purchasing agent over time as a result of inflation. So the bank wants to earn money on the funds it loaned and also protect its purchasing power by adding an amount to make up for inflationary loss. For example, if the bank charges, say, 10 percent interest on money loaned it could be charging 6 percent for the privilege of renting the money plus 4 percent to cover its reduced purchasing power in the future as a result of inflation. The Retirement Fund must also consider the same two factors, together with others, when it manages its investment portfolio. Failure to do so would eventually reduce its capital base. This is what many politicians don’t understand when they believe the Fund controls a large amount of money to meet member’s bimonthly payments. It does not—and the reasons why will be explained in the next article in this series.

[B][I]To be continued.[/I][/B] [I](William H. Stewart is a forensic economist, historian, and military cartographer.)[/I]