North Carolina is known for a lot of things. Controversial voter ID laws. Duke basketball and Tar Heel basketball. Kitty Hawk. I have an unlikely suspect to add to the list: North Carolina has one of the strongest public pension systems in the country that serves teachers, firefighters, police officers and tens of thousands of other public workers.
My organization recently analyzed three of the most successful public pension systems in the country including North Carolina, which is well-funded and well-managed, with one in eight working North Carolinians having access to a public pension.
Defined benefit pensions are the most secure and reliable retirement plan for working families. They keep people out of poverty during retirement because they provide a steady, monthly income that is guaranteed for life. On the flip side, defined contribution plans like 401(k)s, which more and more working Americans are forced to rely on for retirement, simply aren’t reliable. Study after study shows that they do not provide an adequate retirement for anyone except wealthy corporate executives.
So why are North Carolina’s public pensions so strong? It isn’t complicated, and there isn’t a secret formula: they are comprehensive and well-funded. North Carolina has consistently made its annual required contributions to the pension systems. As a result, public workers have received hard-earned and modest retirement benefits for generations. The state was even able to avoid benefit cuts for pensioners during the recession.
Adequately funding pensions is the single most important thing a state can do to ensure a secure retirement for its public servants. If a state has poor funding practices, no investment in alternative assets or cuts in benefits can make up for it, especially if that inadequate funding has occurred over a long period of time.
But even one of the strongest pension systems in the country could not avoid attacks by corporate special interests that want to strip public workers of their retirement security. In the past two years, a handful of legislators have proposed moving North Carolina’s public employees into a risky and inadequate defined contribution system, not because North Carolina’s pension plans are underfunded, but simply because they are ideologically opposed to defined benefit pensions.
As has happened in other states like West Virginia and Michigan, converting from a defined benefit pension plan to a defined contribution plan creates enormous transition costs – something that proponents of 401(k)s are not keen on mentioning – that dramatically increases the unfunded liability of the pension system and severely weakens the retirement security of public employees.
There is nothing inherent in the design of defined benefit pensions that causes underfunding.
Public employees pay a portion of each paycheck toward their pension. As long as the government – their employer – makes its contributions, then the pension will be sustainable over the long-term.
While there will be periods when investment returns will be low, there will also be periods when investment returns will outperform their targets. And no need for concern there: defined benefit plans are long-term investments that are not just based on one year of returns, but over a span of several years. Pensions meet – and sometimes exceed – their long-term rate of return.
For over a hundred years now, cities and states have used defined benefit pensions to provide a retirement for their public employees. Why? Because pensions are designed to weather economic storms and offer the most secure and reliable retirement for public employees.
And North Carolina shows us that when we let pensions work, they work. And they work well.
Tyler Bond is a program assistant at the National Public Pension Coalition.
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