Public Pension Fund - Explained
What is a public pension fund?
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Table of ContentsWhat is a Public Pension Fund?How does a Public Pension Fund work?Academic Research on Public Pension Funds
What is a Public Pension Fund?
Retirement savings funds for public servants - people employed by state and central government departments, or working in the public sector, are called Public Pension Funds (PPF). People employed in law enforcement, maintenance of Parks, municipal workers, etc., are all eligible for being enrolled in a Public Pension Fund plan. People working in the private sector, like corporate employees of Google, are covered under the Private Pension Fund plans. Some private companies do not offer such retirement plans.
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How does a Public Pension Fund work?
A part of the employees salary is remitted into the retirement savings account, with guaranteed and set benefits, independent of the underlying assets performance, upon the employees retirement. It is incumbent upon employers to keep up the flow of a sum of money to the employees pension funds account, determined by a formula that factors in the duration of service and salary amount. If the underlying assets of the pooled investment fund perform poorly, or lose money, the employer is legally obligated to makeup the difference. Employer sponsored pension plans date back to the 1870s in the United States. At its height in the 1980s, the American Express Company covered almost half of the privately employed workforce under its pension scheme. The Bureau of Labor Statistics states that almost 90% of public workforce and 10% of the private workforce in the United States is enrolled in the guaranteed pension scheme. 401(k) plans are the most well known defined-contribution pension plans in the United States for public workers. Its equivalent in the non-profit industry are the 403(b) pension plans. Pay-as-you-go pension plans also come without employer funds match and are funded solely by deductions from the employees paychecks. Pension plans also provide tax sops to both employers and employees. Employer matched sum is accorded tax-advantaged status, while the deductions from paychecks that are added to the pension fund, bring down the total taxable income for employees. The accumulating funds in the plan are also tax-deferred. Once taken out of the funds upon retirement, state and federal taxes may be levied on the gains. Pension from funds completely sponsored by employers with zero input from employees are fully taxable.