Better homes and pensions

January 15, 2017

Inside Insight

Print Friendly, PDF & Email
BY PHILLIP CEASE

MY LAST NERVE: Legislators burned our house

Earlier this week, a state House and Senate panel offered its solutions to fix South Carolina’s pension system, which is anywhere from $20 billion to $74 billion in debt, depending on who you ask. What isn’t being discussed much now is how the pension system got this bad, likely because a lot of legislative leaders have overseen its decline.

There are a lot of reasons for this fiasco. Two of the biggest are poor investments and an unreasonably high assumed rate of return.

With terms like “unfunded liability,” “assumed rate of return,” and “amortization period” thrown around as if they were common parlance, it’s easy to tune out what happened. So let’s try this: Think of the pension system as your house.

Your house is an investment (like the pension system) that requires maintenance (paying the salaries of those who run the system) that can increase in value (pension system makes money) or decrease in value (pension system loses money).

Our legislators encouraged risky investments, which lost a lot of money. At the same time, members of the Retirement System Investment Commission, the agency that runs the state’s pension plan, received $1.4 million in bonuses in one year alone. Incredibly, this practice of awarding bonuses for losing money only stopped in 2013.

It’s as though the contractor you hired to add a bedroom and a bathroom not only didn’t perform the work, but burned half your house down. Clearly you would not be paying him for his work. You might take him to court. You certainly wouldn’t give him a bonus. That would just encourage him to burn the other half down. Yet they kept doing it, year after year.

Then there’s the assumed rate of return. This is the amount that the general assembly mandates the pension system must make. This number — not the actual performance of the invested fund — is used to calculate how much debt the system has.

Currently the assumed rate of return is set at whopping 7.5 percent. Experts think it should be about half that. This past year, it had a return of… 0 percent.

Setting the assumed rate artificially high is like taking out a $500,000 loan on a house worth $250,000. You’re putting yourself underwater. If and when you sell the house for a quarter of a million dollars, you’ll be a quarter of a million in debt. In this case, taxpayers are going to have to cover you.

So when our legislature offers a bill to fix our pension system, keep in mind that the same body oversaw and encouraged the harm it’s proposing to repair, while we sit in the half-charred and over-leveraged remains of our home.