The Retirement Fund’s huge losses in investment income resulting from the government’s failure to pay its full obligatory employer’s contribution is not unlike the proverbial iceberg where seven-eighths of the mass is unseen and unknown. There is an enormous amount of money missing from the fund’s portfolio which is not only unseen—it never will be seen —as it has been lost forever—never to be recovered or made-up.
These losses are a result of the unpaid employer’s contributions by the central government for the past half dozen years or so, contributions along with other funds that could and should have been invested by the Fund in interest earning accounts and income generating investments. This is a financial tragedy of immense proportions which could impact upon the long-term financial security of all retirees for many years to come.
If this money had been owed to a bank, the government would have been in court long ago facing a demand for payment plus accrued interest.
According to a recent article, “the government’s unfunded liability to the Fund has ballooned to $526 million.” I am not aware this debt includes interest. If not, it should.
Retirees must realize that much more than the initial $526 million has been lost.
The loss also includes all the accrued compound interest earnings that under normal prudent investment management would have been earned—but now will never be recovered. Like a financial iceberg, this is the hidden portion that is unknown but probably amounts to another half billion dollars or so. Total loss to the retirees—close to one billion dollars—if not now—then in a few more years.
Retirees, present and future are the losers—big time.
For sake of a simple example, look at it this way—using only $1,000 as an employer’s contribution to make the point.
The $1,000 should be invested in an interest bearing account where it will earn interest sufficient to overcome the loss in purchasing power resulting from inflation. Considering that inflation in the islands has averaged about 5 percent per year, the $1,000 invested must earn at a minimum $1,050 the first year just to preserve the money’s purchasing power—which is what it’s all about anyway.
But that’s not all—you want the $1,000 to earn an additional amount just for renting (investing) the money to the bank (or who ever). The bank pays, say, 3 percent interest or $30, therefore the total interest that must be achieved on the initial $1,000 the first year as shown by this simple hypothetical explanation is 8 percent per year or $80. Multiply this amount, namely $1,080, compounded by the number of years the sum has remained unpaid and you can begin to appreciate how the amount snowballs as the unpaid debt continues to pile-up ever larger and larger over the years as long as it remains due.
This elementary example illustrates the very definite and essential need for invested money to earn interest equal to, or greater than, the rate of inflation plus—an additional sum earned for the use of the money. So, for purposes of making a point, imagine the loss of $1,000 in unpaid employer contributions and other financial obligations the central government owes the Fund—almost 500 times over—and you come close to understanding the gigantic monetary loss to the Fund and ultimately all retirees. This is the unseen loss of the Fund’s financial iceberg, which the central government has chosen to ignore for so many years.
As my dear ol’ granny once pointed out: “Billy, part of —plus the interest as the rest of it—equals all of it.”
And all of it might well be close to a billion dollars in the not too distant future if something isn’t done to convince the central government to take their employer’s obligation to the Fund more seriously and start paying.
Just how much is a billion you might ask?
To give you some idea of the size of a one billion figure—if you sat down to count from one to one billion, you would be counting for almost 95 years.
If you had a dollar for every second that passed starting from right now and moving forward, it would take you 31 years, 8 months, 16 days and few hours to get to one billion seconds. Just think of it—that’s a point in the future in August 2036.
The above is one way of comparing the approximate equivalent amount of money that has not been available to the Fund for purposes of investing and thus a loss to the members.
It would appear that the only alternative available to the Fund at this time is to bring suit against the central government for the full amount owed the Fund plus a realistic amount to compensate for accrued compound interest foregone and long lost.
Yes, yes—and if dogs had wings they could fly. So what to do when it is well known that the central government is broke and can‚t pay the full amount due?
Of course, it would be up to the court to decide—but the full, accurately calculated amount due the Fund should be determined even if can‚t be paid off in its entirety. Certainly some form of pecuniary award should also be considered for the benefit of the Fund and all its members—and in the opinion of this economist —a large one at that.
Additionally, the Fund could possibly take title to certain fixed assets now the property of the central government—for their revenue generating potential. I rather like the Saipan air or seaport as a possible “trade-off” of fixed assets in exchange for a debt “write-off.”
But, God forbid—not the power plant or the water system.
All that’s required to get the money due the Fund is a little “out-of-the-box” creative thinking. Ya‚ know, imagination helped along by a little prayer in court.
At this stage it would appear that the Fund‚s options for legal redress are limited to the following:
1. Continue with the status quo and pretend that somehow it will all work out and that the money will be available from some, as yet unidentified heavenly source, when it’s needed. This appears to be the current mind-set and perhaps even a wishful prayer within the central government. This is known as the “HR-MT” formula or “Hand Ringing & Muddle Through” formula with the prayer, “Blessed are those that must wait—for they shall not be disappointed”—or;
2. Bring suit in an attempt to persuade the government to comply with its obligation and “earmark” money from the general fund to retire its debit to the members. This possibility is interesting in that many, if not all, the judges on the Superior and Supreme Courts are themselves no doubt paying into the Retirement Fund and therefore are probably bias and might be expected to recuse themselves.
It’s understandable. Given this peculiar situation, perhaps the case could then be heard in the Federal Court. One way or the other—it’s time to take concrete steps to resolve the matter once and for all.
I have found people in the islands to be reasonable and I would imagine that all parties concerned would like to see this festering issue resolved—and soon. A fair resolution, and if need be, a “binding” compromised, guaranteed agreement satisfactory to the members, the Trustees and the central government. Such a solution need not be impossible among sensible people.
While at it—retirees should band together and insist that the new Legislature pass a law to prohibit politicians from getting their hands on the member’s retirement money once and for all—and provide severe penalties for failure to contribute the employer’s contribution to the Fund. Retirees should exercise their right of self-government and insist this be done by their elected servants.
For those who don’t want to be bothered, or believe that their best interests will be served with little or no effort on their part, I have a suggestion. Write it on the wall “if you are still young enough to start another career outside government give serious consideration toward the establishment of a second source of income for retirement—a source other than being dependent upon the NMI government because eventually if things don’t change there is the very real possibility that you won‚t have the full retirement income you have been counting on.” (William H. Stewart, Special to the Saipan Tribune)
* * *
Editor’s Note: The author knows a little bit about money having once served in the 1970s as an economic advisor to the general staff, U.S. Corps of Engineers, on the $142 billion Saudi Arabian five-year development plan.