North Carolina’s state employees would see a bleaker and more uncertain retirement under a proposal heard in the Senate Pensions and Retirement Committee. Under the North Carolina Retirement Reform Act (SB 467), the traditional pension—the bedrock source of retirement security—would cease to exist for new state employees, as would health benefits upon retirement or departure from state employment.
Although the bill exempts current state employees from these dramatic changes to retirement benefits, new state employees (those entering service after July 1, 2018) would be required to forego the guaranteed post-retirement income of the defined benefit pension in exchange for the opportunity to enroll in a new 401k plan. Even more troubling, future state employees would no longer have access to the state employee’s health system.
There are quite a few problems with this idea:
Way more risk with 401Ks. Shifting retirement savings from the pension to the 401k places a state employees’ retirement security at the mercy of the stock and bond markets. While the potential to earn more exists, the risk of catastrophic loss is even higher—just ask the millions of baby boomers approaching retirement in 2008 and saw their 401k values collapse in the Great Recession. By 2013, the median worker aged 56-61—e.g., those closest to retirement—saw his retirement savings drop by half after 2007. The picture is even grimmer for workers aged 50-55—the median worker saw her retirement savings lose 70 cents out of every dollar in value over the same period.
Less income for retirees. 401k-only plans do not provide sufficient income for retirees to make ends meet without Social Security and Medicare. According to the Employment Policy Institute, the bottom half of workers nearing retirement age (56-61) have less than $17,000 in savings; those between 50 and 55 have just $8,000. This is clearly insufficient to give any meaningful retirement security to state works, given that it takes a family of two at least $35,700 per year to make ends meet in North Carolina.
Weakens ability to compete with private sector. Pay for state and local government workers in North Carolina is already below the average wage for private sector employees in the same occupations, and a strong pension and health insurance has historically been a major way of attracting and retaining workers who might otherwise choose the private sector instead. SB 467 ends one this important competitive advantage for talent.
Given these issues, it’s clear that SB 467 is the wrong path for ensuring state employees’ retirement security. As the Budget & Tax Center’s Patrick McHugh aptly noted in February about similar proposals, this approach simply amounts to balancing the books on the backs of state workers at a time when the challenges facing the state’s pension system—while real—do not constitute a crisis requiring these kinds of drastic cuts to benefits.
Allan Freyer is the Director of Workers’ Rights at the North Carolina Justice Center.