FBS Summer Conference July 19, 2018

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Eileen Weaver
5 years ago
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1 Understanding the Retirement Rate FBS Summer Conference

2 Employer Retirement Contribution Rate Component Percent of Pay Retirement System 12.29% Retiree Medical 6.27% Disability 0.14% Death Benefits 0.16% Total 18.86% 2

3 20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% History of Contribution Rate Fiscal Year Ending 3 Percent of Pay

4 Impact of Higher Contribution Rates State General Fund State General Fund for LEAs Local and Federal Employees of LEAs Payroll $10,652 $6,331 $1,910 Contribution at FY rate (8.14%) Contribution at FY rate (18.86%) $867 $515 $155 $2,009 $1,194 $360 Difference $1,142 $679 $205 $ in millions; State GF excludes ORP 4

5 Cause #1: Low Interest Rates 5

6 Cause #1: Low Interest Rates We are paying now for both low returns over the last years and expected lower returns in the future We could have lowered return assumption in the past to spread that cost over a longer time, however In late 70s and early 80s, many expected inflation to stay high In late 80s, many expected real interest rates to stay high In late 90s, many expected double digit equity returns At any point in time, lowering the assumption requires higher contributions and/or lower benefits than not lowering the assumption 6

7 Cause #2: Increasing Lifespans 25 Life Expectancy at Age Source: CDC, data for all US not just TSERS Year 7

8 Cause #2: Increasing Lifespans Total increase is only 36% over 55 years A lot of it has been anticipated and reflected in contributions over many years Since 2007, current contribution rate has reflected projected future improvements 8

9 Combined Impact Present value of $1 per year payable for 16 years starting 20 years from now 13% interest rate: $ % interest rate: $2.15 Present value of $1 per year payable for 20 years starting 20 years from now 3% interest rate: $8.24 9

10 Cause #3: Benefit Enhancements Snapshot of benefit provisions at several points in time: Year Unreduced Age Multiplier % on earnings below $4,800; 1.5% above ; Any age with 30 years of service 1.5% ; Age 60 with 25 years of service; Any age with 30 years of service Today 65; Age 60 with 25 years of service; Any age with 30 years of service 1.58% 1.82% 10

11 Cause #3: Benefit Enhancements NC increased benefits less than many other states, particularly around the year 2000 Almost every other state has reduced benefits since 2008 Increased retirement ages Lower multipliers Longer compensation averaging periods Increased employee contributions Reduced cost-of-living adjustments (COLAs) in those states with automatic COLAs 11

12 Cause #4: Retiree Medical Funded on a pay-as-you-go basis, so contribution rate is cost to cover retirees divided by size of active payroll Number of retirees and cost of health care have grown much faster than active payroll 12

13 Cause #4: Retiree Medical Number of retirees (TSERS only) FY FY Growth 88, , % Pre-Medicare Premium $1,736 $6, % Post-Medicare Premium $1,321 $4, % Number of actives (TSERS only) 263, ,013 16% Average compensation $25,937 $44,253 71% Retiree medical contribution rate 2.00% 6.27% 214% Rate would be 16.67% if funded on actuarially sound basis. 13

14 Future Path of Contribution Rates Scenarios: 1. Baseline: Steady increases of a little less than 1% of pay each year until total rate reaches around 30% of pay 2. Market Drop: Could increase by 2% to 4% of pay following a large stock market drop 3. Worst Case: TSERS contribution at Treasury Bond rate (64% of pay) + actuarial contribution for retiree medical (17% of pay) = 81% of pay 4. Best Case: Interest rates rise to around 7% without big drop in stock market. Health cost growth is moderate or assumed by federal government. Then contribution rates would decrease in the medium term. 14

15 Future Path of Contribution Rates Source: 2016 asset-liability study for IAC, TSERS contribution only 15

16 What Can Be Done Benefit cuts within DB plan (traditional pension) for new hires Change to DC plan (e.g. 401(k)) for new hires Continue to increase funding to support current benefit levels New hires after 2020 are not eligible for retiree medical, which will eventually reduce that component to 0% Reducing funding without benefit changes would eventually turn NC into IL, CT, KY, NJ, OK, etc. 16

17 Fiscal Research Division Contact David Vanderweide Fiscal Research Division Suite 619 Legislative Office Building

GENERAL ASSEMBLY OF NORTH CAROLINA Session 2017 Legislative Retirement Note

GENERAL ASSEMBLY OF NORTH CAROLINA Session 2017 Legislative Retirement Note BILL NUMBER: Senate Bill 257 (Eighth Edition) SHORT TITLE: Appropriations Act of 2017. SPONSOR(S): FUNDS AFFECTED: State General