How_Money_Works_-_The_Facts_Visually_Explained

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GOVERNMENT FINANCE AND PUBLIC MONEY

Attempting control

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Increased assets from

investments

SOCIAL SECURITY

BENEFITS

LIABILITIES

Payments to pensioners will

appear as a liability on the

government balance sheet.

Demographics influence the

amount of money needed

to meet this liability. For

example, if the population is

projected to live longer in

old age, the amount needed

for future payments will rise.

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❯❯Overinvestment in equity

(stocks and shares), which can

promise high returns, poses a

potential risk to any pension

fund, and can be especially

damaging to state pension

funds. Japan discovered this

after the nation’s Government

Pension Investment Fund lost

5.6 percent of its value in the

third quarter of 2015 due to

stock market investments.

❯❯Government priorities

can influence the way pension

contributions are invested—not

necessarily in the best interests

of the pension pool

or its future ability to make

payments. In some countries,

a percentage of pension

contributions are lent to the

government for other

purposes, or invested in public

projects such as housing.

WARNING

Managing

investments
In countries with sovereign wealth funds,
the government invests taxpayers’
contributions to increase the available
money in the fund. Investment is usually in
core assets, which are less risky but can still
fluctuate. If stock markets rise, so do
pension funds, and vice versa.

INFRASTRUCTURE ASSET INVESTMENTS

Measuring health

Sufficient money must come in to the pension

fund to maintain or improve it. The fund’s

performance can be assessed in two ways:

❯❯Funding level The amount of money in a pension

fund compared to the amount of pension that

needs to be paid out. This can be expressed as a

percentage or as a ratio (the assets divided by the

liabilities). A funding level of 100%, or a ratio above

1, means that there will be enough money in the

pension fund to meet the payment obligations.

A funding level below 100%, or a ratio below 1,

means there is not enough.

❯❯Deficit The difference between the liabilities and

assets in a pension fund—i.e. the shortfall between

the money coming in and the money due to be

paid out. This is also known as unfunded liability.

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“A pension is nothing

more than deferred

compensation”

Elizabeth Warren

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