We’ve said it before and we’ll say it again: Closing a pension system is a terrible idea.
Shuttering a pension system and shifting new hires to a defined contribution 401(k)-style plan is damaging not only to the thousands of workers whose retirement security is jeopardized but also for taxpayers and the fiscal health of the state as a whole. It’s simply bad public policy.
Unfortunately for the people of the Tar Heel State, the North Carolina legislature didn’t get the memo. A bill currently under review, S.B. 467, proposes closing several state-run pension plans and moving all newly hired employees to a 401(k). The workers affected by this change include teachers, social workers, university employees, correctional officers and more.
North Carolina legislators need look no further than the states and cities that have closed their pension systems to learn of the costly ramifications that follow. We highlighted three states who suffered the consequences of abandoning their pension systems – including one who moved back. In 2005, West Virginia reopened its pension system for teachers after closing the plan in an attempt to improve funding levels in the early nineties. In less than a decade after the plan’s reopening, funding levels more than doubled and teachers now enjoy access to a secure, dignified retirement.
In 1997, the Michigan State Employees’ Retirement System (MSERS) pension plan was closed and new hires were placed in a 401(k)-style plan. At the time of the plan’s closure, the funded status was 109%. With no new employees paying into the pension fund and an aging demographic, plan costs soared and the funding level dropped; by 2012, the plan was severely underfunded at 60.3%. After 20 years under the 401(k) plan, the state’s Office of Retirement Services found that the median balance in these accounts is just $37,260.
After the Great Recession decimated 401(k) accounts across the country, state employees in Connecticut banded together and campaigned for the right to join the closed state pension system. They were successful, and in 2012, transfers out of the faltering 401(k) plan and into the pension began. Estimates place the total cost savings for the State of Connecticut as a result of these transfers at $10 million per year.
State employees weren’t the only in Connecticut to recognize the value of a pension: firefighters in the city of New London moved back to a pension in 2014 after the previous defined contribution plan failed to provide adequate financial security for retirees.
Aside from providing employees with the most secure retirement, pensions also serve as a valuable tool to recruit and retain talented workers. In 2012, the city of Palm Beach, Florida moved from a traditional pension to a hybrid defined benefit-defined contribution plan. The city lost 24 public safety officers to neighboring jurisdictions and another 28 left the following year. Without competitive retirement benefits to offer, Palm Beach’s police and fire departments were inexperienced and understaffed. In 2016, the city council voted to return to a traditional defined benefit pension.
In addition to the financial burden of increased plan costs, closing a pension system critically hinders a state’s ability to recruit and retain quality employees. If North Carolina’s legislators proceed with their ill-advised plan, they’ll face the same consequences suffered by the states and cities before them.