Tags: actuarial | assumptions | pension | plans

NYT: Inaccurate Assumptions Wreak Havoc with Public Pensions

By    |   Friday, 10 July 2015 08:05 AM

Life expectancy estimates play a major role in the finances of pension plans. That's because the estimates determine how much money the plans set aside to pay retirees.

If the projections are on the mark or overestimate retirees' life spans and the plans put aside enough money to meet those estimates, there shouldn't be a problem. But if the projections underestimate retirees' life spans, leading the plans to put too little money aside, there could be big trouble.

New York Times reporter Mary Williams Walsh offers a poignant example. Jim Palermo, when he was a trustee of La Grange, Ill., found that the village's pension plan for local police officers and firefighters was underestimating their lifespan.

"After Mr. Palermo dug into the numbers, he found that the actuary was using a mortality table from 1971 that showed La Grange’s police officers and firefighters were expected to die, on average, before reaching 75, compared with 79 under a more recent table."

Oops.

Elsewhere on the retirement front, you're probably quite familiar with the benefits of using a 401k plan or an IRA to save for retirement, but you may be less familiar with health savings accounts (HSAs).

If you have a health insurance plan with a deductible of $1,500 or more, you can set up an HSA. The money you put into your HSA is tax deductible. And as long as you use the money to pay uninsured medical expenses, it remains untaxed, unlike withdrawals from your 401k.

For 2015, you can contribute up to $3,350—up to $6,650 for a family--to an HSA. The maximum goes up by a small amount each year.

You can keep the money in cash, earning a small amount of interest, or invest in financial markets. But Doug Fisher of Fidelity pointed out to CNNMoney that you should keep in cash whatever money you may need for your medical expenses over the current year.

That's because you can easily lose money in financial markets. Indeed, if you think you'll ultimately need all the money in your HSA for medical expenses, you may want to keep it all in cash.

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Life expectancy estimates play a major role in the finances of pension plans. That's because the estimates determine how much money the plans set aside to pay retirees.
actuarial, assumptions, pension, plans
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2015-05-10
Friday, 10 July 2015 08:05 AM
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