Certified Government Financial Manager (CGFM) 2025 – 400 Free Practice Questions to Pass the Exam

Pension funds are indeed the most common form of underfunded liabilities that governments encounter. This situation arises as many government entities offer defined benefit pension plans, which promise retirees specific benefits based on their salary and years of service. Over time, various economic factors—such as lower than expected investment returns, demographic changes, and extended life expectancy—can lead to a shortfall in the funds available to meet these future obligations.

Governments often face challenges in maintaining adequate funding for these pension systems, resulting in underfunded liabilities that can significantly impact future budgets and financial stability. Actuarial estimates are conducted to determine the present value of future pension liabilities, and funding strategies need to be effectively managed to ensure that these promises can be fulfilled.

While healthcare obligations are also significant liabilities for governments, they do not surpass pension obligations in terms of the overall prevalence of underfunding issues. Construction contracts and deferred revenue represent different aspects of government financial obligations and do not typically qualify as underfunded liabilities in the same context as pension systems. Therefore, recognizing pension funds as the primary source of underfunded liabilities provides insight into the broader fiscal challenges that governments must address in financial planning and management.