As a finance expert, I have analyzed countless pension systems, but the bankruptcy of North Carolina’s retirement plan raises critical questions. The state’s pension fund, like many others, faces structural challenges that threaten its solvency. In this article, I dissect the root causes, quantify the financial risks, and explore potential remedies.
Table of Contents
Understanding the NC Retirement System
North Carolina operates two major retirement plans: the Teachers’ and State Employees’ Retirement System (TSERS) and the Local Governmental Employees’ Retirement System (LGERS). Together, they cover over 900,000 members. Despite being one of the better-funded state plans, TSERS had a funded ratio of 84.3% in 2022, below the recommended 90% threshold for long-term stability.
The Math Behind Pension Solvency
A pension’s health hinges on its funded ratio, calculated as:
\text{Funded Ratio} = \frac{\text{Plan Assets}}{\text{Plan Liabilities}} \times 100If liabilities exceed assets, the plan is underfunded. For example, if TSERS has $40 billion in assets but $47.4 billion in liabilities, its funded ratio is:
\frac{40}{47.4} \times 100 = 84.3\%This gap signals trouble.
Why the NC Retirement Plan is Failing
1. Demographic Shifts
North Carolina’s aging workforce strains the system. In 2000, there were 4.5 workers per retiree; today, it’s 2.3. Fewer workers mean fewer contributions supporting more retirees.
2. Investment Shortfalls
Pension funds assume a 7.2% annual return, but market volatility disrupts this. For instance, if the fund earns only 5%, the deficit widens. The difference compounds over time:
\text{Shortfall} = \text{Expected Return} - \text{Actual Return}3. Inadequate Contributions
State contributions have lagged. Required contributions are calculated as:
\text{Annual Required Contribution (ARC)} = \text{Normal Cost} + \text{Amortization Payment}If the state skips payments, unfunded liabilities grow.
4. Benefit Design Flaws
North Carolina’s plan uses a defined benefit (DB) structure, guaranteeing payouts regardless of fund performance. This contrasts with defined contribution (DC) plans, where risk shifts to employees.
Comparing NC to Other States
| State | Funded Ratio (2022) | Assumed Return | Unfunded Liabilities |
|---|---|---|---|
| North Carolina | 84.3% | 7.2% | $7.4 billion |
| Wisconsin | 104.9% | 6.8% | Fully funded |
| Illinois | 44.1% | 6.5% | $139 billion |
Wisconsin’s near-full funding stems from higher contributions and conservative return assumptions. Illinois’ crisis shows what happens when reforms lag.
The Domino Effect of Bankruptcy
If NC’s plan collapses, the consequences ripple:
- Tax Increases – The state may hike taxes to cover shortfalls.
- Benefit Cuts – Retirees could see reduced payouts.
- Credit Downgrades – Lower bond ratings raise borrowing costs.
A Case Study: Pension Obligation Bonds (POBs)
Some states issue POBs to plug gaps. If NC borrows $5 billion at 4% interest, the cost over 30 years is:
\text{Total Payment} = P \times (1 + r)^n = 5 \times (1.04)^{30} = \$16.2 \text{ billion}This is risky—if investments underperform, debt balloons.
Solutions to Salvage the NC Retirement Plan
1. Increase Contributions
Raising employer/employee contributions by 1-2% could stabilize the fund. For a worker earning $50,000, a 1% hike means an extra $500 yearly.
2. Adjust Benefit Formulas
Reducing cost-of-living adjustments (COLAs) from 2% to 1% slows liability growth.
3. Shift to Hybrid Plans
A DB-DC hybrid shares risks. For example:
- DB portion: 1% of salary per year worked
- DC portion: 3% employer match
4. Lower Return Assumptions
A 6.5% assumption is more realistic than 7.2%, forcing earlier reforms.
5. Alternative Investments
Increasing private equity or real estate allocations may boost returns, but risks rise too.
The Human Impact
Behind the numbers are real people. A teacher with 30 years’ service expecting $30,000 yearly could lose $300 annually if COLAs freeze. For retirees on fixed incomes, this hurts.
Final Thoughts
North Carolina’s pension crisis is manageable—but delay worsens it. By raising contributions, tweaking benefits, and investing wisely, the state can avoid bankruptcy. Other states offer lessons; the question is whether NC will act before it’s too late.
