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Can you explain this a bit more? What do you mean they don't contribute on time?

by Yoofie 6y ago

eru 6y ago
It's all about accounting. Naively, you might want to keep track only of money that flows in and out of your business. But that can be rather misleading. So typically account for expenses when they are incurred. That means for example that in your accounting you set aside a bit of money for your rent every day, even if the physical cash only leaves your wallet once a month or even once a year. That way your accounting reflects the economic reality of your business, even if it doesn't reflect how much cash is in your wallet. The economic reality is important, because even if you have cash on hand now, but predictably won't earn enough money to pay back a debt that's coming due at the end of the year, you better panic early instead of acting all surprised. See https://www.accountingtools.com/articles/when-are-expenses-incurred.html https://www.accountingtools.com/articles/when-are-expenses-i... for more details. Well, when you promise people a pension dependent on how long they worked for you, it makes sense to make a provision every day they work for you, for the predictable outflow of cash you will have in a few decades. Typically you build up a fund or some kind of reserve to meet these predictable future outflows. See also https://en.wikipedia.org/wiki/Reserve_(accounting) https://en.wikipedia.org/wiki/Reserve_(accounting) In the special case of pensions, you might even go one step further: instead of just having a reserve on your books, you might want to ring fence a specific amount of money and put that part of your balance sheet in a separate investment vehicle or fund. So that for example bankruptcy of the parent company wouldn't imperil pensions already promised. See also https://en.wikipedia.org/wiki/Pensions_crisis https://en.wikipedia.org/wiki/Pensions_crisis The opposite of having such reserves is called 'unfunded liabilities'. Sounds nasty, doesn't it? From the Pension Crisis article: > In addition to states, U.S. cities and municipalities also have pension programs. There are 220 state pension plans and approximately 3,200 locally administered plans. By one measure, the unfunded liabilities for these programs are as high as $574 billion. The term unfunded liability represents the amount of money that would have to be set aside today such that interest and principal would cover the gap between program cash inflows and outflows over a long period of time.

Can you explain this a bit more? What do you mean they don't contribute on time?

by Yoofie 6y ago

Can you explain this a bit more? What do you mean they don't contribute on time?

eru 6y ago

It's all about accounting. Naively, you might want to keep track only of money that flows in and out of your business. But that can be rather misleading. So typically account for expenses when they are incurred. That means for example that in your accounting you set aside a bit of money for your rent every day, even if the physical cash only leaves your wallet once a month or even once a year. That way your accounting reflects the economic reality of your business, even if it doesn't reflect how much cash is in your wallet. The economic reality is important, because even if you have cash on hand now, but predictably won't earn enough money to pay back a debt that's coming due at the end of the year, you better panic early instead of acting all surprised. See https://www.accountingtools.com/articles/when-are-expenses-incurred.html https://www.accountingtools.com/articles/when-are-expenses-i... for more details. Well, when you promise people a pension dependent on how long they worked for you, it makes sense to make a provision every day they work for you, for the predictable outflow of cash you will have in a few decades. Typically you build up a fund or some kind of reserve to meet these predictable future outflows. See also https://en.wikipedia.org/wiki/Reserve_(accounting) https://en.wikipedia.org/wiki/Reserve_(accounting) In the special case of pensions, you might even go one step further: instead of just having a reserve on your books, you might want to ring fence a specific amount of money and put that part of your balance sheet in a separate investment vehicle or fund. So that for example bankruptcy of the parent company wouldn't imperil pensions already promised. See also https://en.wikipedia.org/wiki/Pensions_crisis https://en.wikipedia.org/wiki/Pensions_crisis The opposite of having such reserves is called 'unfunded liabilities'. Sounds nasty, doesn't it? From the Pension Crisis article: > In addition to states, U.S. cities and municipalities also have pension programs. There are 220 state pension plans and approximately 3,200 locally administered plans. By one measure, the unfunded liabilities for these programs are as high as $574 billion. The term unfunded liability represents the amount of money that would have to be set aside today such that interest and principal would cover the gap between program cash inflows and outflows over a long period of time.