The stock market was flat last year. Now, it’s dropping like a rock. Interest rates are low and going lower. But according to the assumptions behind the Teachers and State Employees Retirement Fund, pension fund investments are supposed to earn 7.25%.
A new report from George Mason University shows what will happen if the assumptions baked into the pension fund investments don’t come true. Today, using the expected future return of 7.25%, the State Pension Fund shows a deficit of $3.4 billion. But given the fact that interest rates on conservative bond investments are no where near 7.25%, a more realistic assumption around 4% turns the $3.4 billion deficit into a $34 billion hole.
And who will be called upon to fill that $34 billion hole? The old taxpayer.
The new majority in the Legislature deserves credit for cleaning up the fiscal mess they found in 2010. But the pension fund is a potential ticking time bomb. No, it probably won’t explode in the next few years. But down the road, the rosy investment return assumptions which don’t match the current economy are going to blow up the state budget.
It’s time for the politicians of today to step up to the plate and fix this problem. Defuse the bomb by moving new state employees and teachers into a system like a 401 K where taxpayers aren’t on the hook for a guaranteed return. Washington can print money. North Carolina can’t.