The story goes that when asked to name the most powerful force on earth, Albert Einstein replied, ‘Compound interest.’ I’m not arguing.
If you’re an investor and understand how to harness it that force works well.
But if you find yourself on the wrong side of that force it can feel like the scene at the end of the movie Thelma and Louise – where you’re sitting in a ’66 Thunderbird heading straight for a cliff.
And when it comes to the State Retirement Fund that’s where taxpayers are headed.
For decades, politicians have promised state employees and teachers they’ll receive fixed monthly pension checks and free medical insurance when they retire. Each year the state put cash in the Retirement Fund, invested the money, figured it would earn 7.25% a year, and that would pay the bills.
It worked fine until it didn’t.
In fact, the State Retirement Fund hasn’t earned a 7.25% return in 15 years – so instead of compounding interest it’s been compounding debt. But nobody seemed to notice.
One Wednesday morning a couple of weeks ago I started the day in Raleigh listening to a report about the Retirement Fund’s unfunded debt – which is $80 billion. This year state taxpayers paid $1.5 billion into the fund towards covering that debt. Within a decade that payment is projected to grow by $3 billion – to a total of $4.5 billion a year. And when that happens we face two hard facts: 1) We either cut spending, or 2) raise taxes.
Let’s put a spending cut that big in perspective: $3 billion a year is the approximate amount the state spends to pay for the entire UNC system.
It’s not a pleasant picture. But the debt is there. It exists. And there’s no avoiding it. So tax increases, spending cuts, or some combination of the two are going to happen.
But that’s not the whole story. The State Retirement Fund’s debt isn’t sitting there frozen. It’s compounding. And growing. The debt’s getting bigger every day. So isn’t the first step to stop incurring more debt?