| mySPIN |
 Fix Pension Plans Before Its Too Late
by Tom Campbell
May 7, 2009
What will North Carolina do if the state is unable to pay thousands of public employees the retirement benefits promised them? Such a crisis is possible if state leaders don’t take action soon.
A perfect storm is forming. For many years the state contributed 8 to 10 percent of employees’ salaries into the retirement system, but in recent years the contribution was reduced to about 3 percent, partially because investment earnings had exceeded projections. That isn’t the case today. Our pension plan, like all investments, has been hit by the recession and lost billion in 2008 and .1 billion in the first quarter of this year. We are underfunding retirement plans while losing principal from our investments at the same time the state is facing a billion budget shortfall.
There are two things North Carolina should do to avoid a major future crisis. First, we must come up with the money to get and keep our current retirement system fully funded in order to pay off all promised benefits to our employees. The Treasurer says we need to contribute more than 0 million to bring the pensions back to full funding; otherwise we could easily project a billion dollar liability by 2010.
We don’t want to put ourselves in a position of promising benefits without funding them, much as we currently face with our State Health Plan. Prior to a recent change our state promised to pay an employee’s health insurance premiums, beginning at age 65, if the employee had worked for the state five or more years. No money was put aside to pay these promised benefits and actuarial estimates now put the state’s liability at more than billion, essentially guaranteeing North Carolina a future funding crisis. Let us not forget that much of the reason why our major car companies are in such deep financial trouble is because they didn’t fully fund pension and health plans for retirees.
But we must also switch our retirement system from a defined benefit to a defined contribution plan. Under this new retirement system, all employees starting to work for the state after a certain date would have a percentage of their salaries invested into a retirement account in their name. The employee would have several options for how investing the money in his or her account, assuming as much or as little investment risk as they desired. Come retirement time the employee would draw from the amounts contributed and earned, similar to a 401(k) plan.
The state would effectively be operating two different retirement systems for some years to come, but at some point in the future would be relieved from having to pay guarantee defined benefits to employees. This is the approach many public and private organizations have wisely chosen so as to avoid making promises they may not be able to keep in the future.
The crisis scenario of not being able to pay retirement checks doesn’t have to happen if our state leaders will address this issue soon. The longer we wait, the more it is going to cost taxpayers in our state, but the most important point is that we shouldn’t put our public employees in a position of worrying about their retirement. Promises made must be promises kept. |
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