Taking the Honest Approach

November 17, 2017

Inside Insight

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South Carolina Pension

Fixing South Carolina’s pension system requires realism

By BRYCE FIEDLER

The Public Employee Benefit Authority (PEBA) – the agency responsible for administering the state’s retirement plans – recently released its annual report assessing the South Carolina Retirement System (SCRS). In a huge upswing from previous years, the state’s pension investments performed very well during FY16-17, returning a rate of 11.88% on investment.

This looks like great news for the state, but we shouldn’t exhale a sigh of relief just yet. South Carolina’s pension system remains in serious danger, and now more than ever, we need to address our crumbling pension system with a deliberate sense of urgency.

Considering our pension situation more holistically: Over the last decade or so, the SCRS realized a return of 5%, considerably less than our statutorily set assumed rate of return of 7.25%. As The Nerve has stated previously, this assumed rate is woefully unrealistic. One expert testifying before the Joint Committee on Pension Systems Review suggested a rate between 2-4% is more practical. By using our current assumed rate, we underestimate the actual unfunded liability.

In fact, the Legislative Audit Council suggested that if the pension system used the accounting standards applied in the private sector, the pension liability would increase anywhere from $19 billion to $57 billion.

Lawmakers had a chance to address this problem with legislation they passed during the 2017 session, but came up frustratingly short. The law only marginally altered the assumed rate of return from 7.5% to 7.25%, and increased both employer and employee contributions.

It’s also important to remember that employer contributions are coming from the taxpayer’s wallet. The only funds state that agencies have to spend are tax dollars allocated to them by lawmakers. By raising the employer contribution, lawmakers are shifting a heavier burden on taxpayers to pay for the pension system.

That legislation is intended to be phase one of a series of reforms: the first modifying financial and governance aspects of the current system, and the second restructuring it entirely for future employees. It is vital, however, that lawmakers avoid using one year of financial achievement to justify lackluster, insufficient reforms to the pension plan structure.

The legislature has several options, ranging from a continuation of the current defined benefit system – where employees are guaranteed a set amount after retirement – to transitioning to a defined contribution system – essentially a 401(k) program – or a hybrid plan combining the two.

This issue will certainly elicit conflicting perspectives and political pressure in the upcoming legislative session. After all, the pension system affects the lives of each state employee, both working and retired. But it’s a conversation that needs to be had.

Lawmakers cannot let the sensitivity of the matter prevent them from assessing the flaws in our defined benefit system and making the necessary structural changes. To do so would be an injustice to those who will bear the responsibility of paying for it in the future.

And the need to be honest about our pension system doesn’t just apply to lawmakers. As a community, we need to soberly address the reality of our situation. The costs of paying off our debt will be high, and we will be paying for many years to come.

We need a system designed with realistic expectations. One that can serve the dedicated members of our state workforce without crippling the state’s economy. It is only with this approach that we can ensure sustainability and avoid repeating the costly mistakes of our past.

  • Anthony C Gilliard

    The Federal Pension Plan, Social Security is in just as bad shape!
    Governments Promise too much!!

  • yarblls

    “By raising the employer contribution, lawmakers are shifting a heavier burden on taxpayers to pay for the pension system.”

    This is simply not true – the state agencies have to reduce costs elsewhere unless the amount allocated by the state to each agency was increased respectively…which it wasn’t.

    • You raise a good point. In the 2017 budget, lawmakers covered the first year of increases for the agencies, and most likely the increased pension benefits will factor in to the agency budget discussion in the next session. If the agency burden becomes too great, lawmakers are more likely to propose additional taxes/fees than to cut spending to cover it.

      However, agencies only comprise a part of the SC retirement system. It also includes municipalities, counties, school districts, etc. Most counties and school districts are unlikely to have the funds set aside to cover these mandatory increases, which will likely lead to local tax hikes down the road.