THE NORTH CAROLINA RETIREMENT SYSTEM AND YOUR PENSION - PART III SOCIAL SECURITY AND THE NATION’S STATE PENSION PLANS
Social Security is very different from the state funds. It holds no investments. Current payments to retirees come from money people are now paying into the System. If there is more coming in than going out, the federal government spends it. The people in Washington talk about a “trust fund” and a “lock box” as though that means something. There is no trust fund, and the only thing in the lockbox is a piece of paper that says, “IOU $3 trillion.” Signed ‘The Government.’ Politicians don’t talk about this. They know that if they tell the truth, it will hurt their reelection.
When Social Security began in the late 1930s, 2,000 workers contributed for every 100 retired people. 20 years ago, there were 47 million retired people and 325 workers for every 100 retirees. Now, new groups are being covered and people are living longer. 65 million people draw Social Security, and there are only 270 workers per 100 retirees. That ratio is going to get worse as Baby Boomers retire. Options to cure the problem are few.
Politicians will not tell voters the bad news – that eventually somebody must pay. The amount needed to solve the problem is unknown, but right now every family in America owes $23,000 for the IOU in the “lockbox.” And it would take another $130,000 per family to make Social Security as sound as the North Carolina Fund. The Government does not dare send us a bill for that.
Added to the woes of Social Security is the generally poor state of the 50 state plans. North Carolina is one of the best at 90% funding. But overall, the states are only about 70% funded. This leaves a $1.4 trillion shortfall, or about $4,600 for every person in America. Politicians will never tell their constituents the truth about their promises that they cannot keep.
Instead, the pension obligation will be paid in three ways, and probably a combination of all three:
Raise the withholding tax on those paying in.
Cut the benefits for those taking out.
Print the money and hand it out, creating inflation. This will be a tax on everybody because the dollars will buy less. But politicians don’t have to call it a “tax,” and they can blame the inflation on somebody else.
The Social Security System operates like a scam, paying money out to a small group with money that is taken in from a bigger group. And like all such Ponzi schemes, the base is shrinking, and the inflow won’t be able to keep up with the outflow. It would be illegal if anyone but the federal government did this. And the state funds are following the federal model.
401K, 403B, AND 457 (SUPPLEMENTAL) PLANS
The Treasurer’s office has another plan that allows employees to save extra money for their retirement. One of these is available through your state employer.
You can put extra dollars into a savings plan in your name, and your employer may put in as much as $.50 for every dollar you contribute, an instant bonus to you. You invest with mutual funds that the plan provides. The money will grow tax fee until you draw it out. All the money in the fund belongs to you.
This generous plan may mean the difference between a comfortable retirement and just getting by. If you make good investments, this extra retirement fund can build your “nest egg.”
WHAT A NORTH CAROLINA EMPLOYEE CAN EXPECT
As a fund member, you need to know how the three plans - the Retirement Fund, Social Security, and one of the Supplemental plans - impact your retirement years.
For you to live comfortably, your retirement income should be 80% of what you made when you were working. If you have a full career in the North Carolina system, you can expect to get a pension of about half of your final pay. If you work less, that percentage will be less. Social Security may provide another 20% of what you need. The two still leave a shortfall of at least 10%. And many people will not have worked their full career to build up their retirement.
Most people in North Carolina have a retirement of little more than half of what they need. If you are depending on your state pension and Social Security, you should have other savings, and a North Carolina Supplemental plan is a good place to start.
THE NORTH CAROLINA FUND - LOOKING FORWARD
The good news is that the fund is on firm ground, but challenges remain for the Treasurer and his staff.
History is on Folwell’s side when he lowered the expected return. The stock market has enjoyed a decade of great results. And interest rates have been going down for forty years. At some point interest rates will rise. This will be good news for bonds in the fund in the long run. But in the short run, rising interest rates will create a headwind for stocks.
Since Harlan Boyles’ tenure, fund investments have moved from mostly bonds and some public stocks to investments that are now 70% split between traditional stocks and bonds, and 30% in other asset categories added over the last few years. While necessary and with successful results, the new categories add volatility and risk that was not present in prior years.
For the 10 years just ended the fund returned 9.8% annually. This return boosted the assets and eased pressure for the state to inject extra money. But markets don’t go up forever. And history cannot to be ignored. 10-year returns were last at this level in 2005. The next 10 years brought a return of only 5.5% a year. That return would now mean a shortfall of another 10%, placing the fund in its worst position in years.
Folwell says that until now, assessing risk and return for the fund has been the challenge. It is still a challenge, but an even bigger one is finding money to put into the plan.
Since the beginning of 2022, the economy and the markets have shown signs of just such a negative outcome – inflation and interest rates have awakened from a 40 year nap, causing a decline in stocks, bonds, and the buying power of workers’ dollars.
GET INVOLVED – IT’S YOUR MONEY
If you don’t know how much to save, retirement tools on the internet can help you, or you can hire a financial advisor. A word of caution - advisors range from very good to terrible. Ask someone you trust to recommend one.
To most North Carolinians, pension funds and Social Security are a mystery. You need to know about them. And this goes for the participants and the other 10 out of 11 people whose tax dollars also go into the Pension Fund and Social Security System. Everyone should look at the Treasurer’s report which you can find on the internet. Also let your state officials know that you are watching what they are doing to protect your pension.
And share this report with others who have a vested interest in the fund – that is everyone who lives in North Carolina.
Gene Hoots was born in Winston-Salem. He has lived in North Carolina all but two of his 83 years. He worked at R.J. Reynolds for 21 years where he oversaw pension and employee savings plans’ investments. For the following 30 years, he was with an investment firm he co-founded. Two years ago, he wrote a book, ‘Going Down Tobacco Road,’ a history of the tobacco business in North Carolina and R. J. Reynolds Tobacco Co. Most of his career has been devoted to helping people prepare their savings for retirement. You can learn more at his websites: goingdowntobaccoroad.com and genehoots.substack.com.
You’ve pretty much nailed it. Whilst I agree that interest rates have to rise, I don’t think this bunch of central bankers have the mettle to raise them enough. They’ve backed themselves into a corner with all the printing.
Hi Gene, You need to address where the funds go from people who contributed to SS while serving in the NC Army National Guard. The government put in the windfall clause against people serving our country for 20 years or more then retiring to work another job as civilians. I lost at least $500/mo from this legislation and feel stabbed in the back by the federal government who I worked all my life for. Not fair at all!