Pension Flexibility: North Carolina

Retaining Effective Teachers Policy

Goal

The state should ensure that pension systems are portable, flexible and fair to all teachers.

Meets a small part of goal
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Flexibility: North Carolina results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/NC-Pension-Flexibility-9

Analysis of North Carolina's policies

North Carolina only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable, does not vest until year five (or year 10 for new teachers) and does not provide any employer contribution for teachers who choose to withdraw their account balances when leaving the system. It also limits flexibility by restricting the ability to purchase years of service. However, the state is commended for offering a fully portable supplemental savings plan.

Teachers in North Carolina also participate in Social Security, so they must contribute to the state's defined benefit plan in addition to Social Security. Although retirement savings in addition to Social Security are good and necessary for most individuals, the state's policy results in mandated contributions to two inflexible plans, rather than permitting teachers options for their state-provided savings plans.

Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Nonvested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Teachers in North Carolina hired prior to August 1, 2011 vest at five years; vesting has been raised for teachers hired after that date to year 10.  Teachers who leave the system prior to these points have limited options.

Teachers in North Carolina with less than five years of service who choose to withdraw their employee contributions upon leaving only receive their own contributions. Teachers with at least five years of service receive their employee contributions plus interest. This means that those who withdraw their funds accrue fewer benefits or at least no benefits beyond what they might have earned had they simply put their contributions in basic savings accounts. Further, teachers who remain in the field of education but enter another pension plan (such as in another state) will find it difficult to purchase the time equivalent to their prior employment in the new system because they are not entitled to any employer contribution.

North Carolina limits teachers' flexibility to purchase years of service. The ability to purchase time is important because defined benefit plans' retirement eligibility and benefit payments are often tied to the number of years a teacher has worked. North Carolina's plan allows teachers with at least five years of service to purchase time for previous teaching experience, up to 10 years. While better than not allowing any purchase at all, this provision disadvantages teachers who move to North Carolina with more teaching experience. In addition, the mandatory five year of service before purchasing previous service makes the purchase cost more expensive than if allowed earlier. The state's plan also allows teachers with at least five years of service to purchase up to six months of service per approved leave of absence. This is a disadvantage to any teacher who needs to take more than six months of a leave for paternity or maternity care, or for other personal reasons.

The state is commended for offering a fully portable supplemental savings plans. The state offers a 401(k) plan with some employers offering contributions and also offers a 457 plan.

Citation

Recommendations for North Carolina

Offer teachers a pension plan that is fully portable, flexible and fair.
North Carolina should offer teachers for their mandatory pension plan the option of either a defined contribution plan or a fully portable defined benefit plan, such as a cash balance plan. A well-structured defined benefit plan could be a suitable option among multiple plans. However, as the sole option, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in North Carolina participate in Social Security, they are required to contribute to two defined benefit-style plans.

Increase the portability of its defined benefit plan.
If North Carolina maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw interest and employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience, at least one year per approved leave of absence, and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force. 

Offer an employer contribution to the supplemental retirement savings plan.
While North Carolina at least offers teachers the option of a supplemental defined contribution savings plan, this option would be more meaningful if the state required employers also to contribute. 

State response to our analysis

North Carolina recognized the factual accuracy of this analysis. However, the analysis has been updated subsequent to the state's review to reflect recent policy changes.

Research rationale

NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010).