INTRODUCTION
In late 2021, I met with North Carolina State Treasurer, Dale Folwell. He talked about the challenges in keeping the pension fund in sound condition. This is the first in a three-part series on the fund’s history, current status, and future. Many of the comments apply to every other state pension fund and our national Social Security system.
WHY SHOULD YOU CARE ABOUT THE FUND?
The North Carolina Retirement Fund is the 8th largest of the 50 state funds. In assets, it is ranked 33rd in the world. But most North Carolinians never give the Retirement Fund a thought. You may not be interested in it, but it is interested in you. The fund holds $120,000 for 1 of every 11 people in the state - teachers, firefighters, public employees - to provide them a pension. And every North Carolina family pays over $1,000 a year in taxes to keep the fund solvent.
If you had $120,000 in a personal account or if you got a bill each year for $1,000, you would pay attention. And this should be just as true for the state fund, even if you don’t get a statement showing what you own or pay. A well-managed fund means savings for you; poorly managed, it will cost you lots of money.
The good news is that North Carolina’s fund is healthy. It ranks 9th among state funds based on its ability to pay its pensioners. (Many public funds have been so poorly managed that they can never pay the pensions they have promised. Although they keep pretending they can.)
THE TREASURER’S JOB
Treasurer Dale Folwell is the Fiduciary of the Retirement Fund. He is one of only two state treasurers who solely bear that responsibility. He alone is accountable for $113 billion of fund investments.
How much money is this? If you had silver dollar size coins worth $10 each, the fund would be a stack of coins covering a football field, and over 23 feet high. But Folwell can’t stack the money, put a fence around it, and just watch it. 345,000 working people are putting in about $5,000 a year and their employers (and therefore the taxpayers) are adding another $10,000. At the same time, 360,000 retirees are taking out $22,000 a year (25 boxcars of those silver coins each month), and 288,000 more no longer contribute but will take a pension later.
The Treasurer must make that money grow to pay these 993,000 pensions. And that is getting harder all the time. The participants are expecting more. The number of retirees is growing, and the number of workers is shrinking. Taxpayers do not want their taxes increased. And investing has become more challenging over the years.
HISTORY
North Carolina Treasurers have done a good job back to at least 1977 when Harlan Boyles became Treasurer. He held the job for 24 years and was followed by Richard Moore in 2001 and Janet Cowell in 2009. Dale Folwell became Treasurer in 2017.
A key grade on my Treasurer’s report card is the plan’s funding level. This means - How close is the fund to having enough money to meet all its obligations forever? North Carolina’s long-term record is good. While the fund is not fully funded, it ranks 9th among all state pension funds at about 87%, certainly worth an ‘A.’
While doing this, the state’s bond rating has been AAA, and the state can borrow money at the lowest possible interest rate, saving millions for the taxpayers. On this, the Treasurers get an ‘A+’
WHAT MAKES A RETIREMENT PLAN WELL FUNDED?
It is hard to calculate how much money a pension fund will need years from now. Young people in the plan may still be drawing a pension in sixty years. Each year, an actuary, highly skilled in mathematics, calculates the amount the fund should have in it. But the answer is at best an educated ‘guess.’ Many things affect the funding - the number of workers, how much they make now, how much they will make going forward, how long they will work, how long they will live, and most important – how much the fund’s investments will earn.
The actuary’s answers are based on experience, but the future will not be like the past! What if inflation picks up and workers’ pay rises faster than expected? What if people live longer and draw pensions for more years than expected? And most unpredictable, what if the investments do better or worse than expected? These questions keep the Treasurer awake at night. If things work out well, his pile of silver grows. But if not, he must find more money.
PLAYING GAMES WITH THE NUMBERS
“Figures lie, and liars figure,” but the actuary does remarkably well with ‘educated’ guesses. The actuary ‘smooths’ the market ups and downs, so that the fund is not whipsawed by one good or bad year.
The most unpredictable factor in the funding forecast is the actuarial rate of return; that is – what return will the fund make in the future. This depends on the interest that the fund’s bonds earn and the profits from its stocks. No one can predict what interest rates will be and how much the stock market will go up or down in the next fifty years. So, the actuary picks a “reasonable” number, usually 6-8% a year. When the fund’s investments do better than the actuarial number, then the funding level goes up; it goes down if investments don’t meet the target.
Politicians like to give voters good news. An easy way to do that with the pension fund is to set a high actuarial rate of return. The higher the rate, the sounder the fund appears to be. This amounts to saying, “We think things will be really good in the future, so we won’t put any more money in now.” North Carolina has had reasonable actuarial rates, and they have been adjusted downward over the years, reflecting reality.
Coming Soon – Part II: The cost of operating the fund, Keeping the pension safe, The benefit to employees.
THE NORTH CAROLINA RETIREMENT SYSTEM AND YOUR PENSION - PART I
Good wealthy stuff Gene! I’m so much more smarter because of you!
Super thanks,
Patrice
Most informative. Thanks. Would appreciate a link that rates the various state fund's ranking.