The celebratory phrase, “a good step” is often heard bouncing around the echo chamber of the South Carolina Statehouse.
It reverberates across the pink and white checkered marble floor and hangs over most major pieces of legislation. Some of these bills have good points, but fall short of addressing the underlying problem in question.
Take, for instance, the pension reform bill approved last week by the House and Senate.
The bill, now before Republican Gov. Henry McMaster’s desk, falls short of reducing the state’s more than $20 billion pension debt, at best.
At worst, it’s a bad bill that celebrates taking “a good step” while it perpetuates the gap between the state’s obligations to retirees and the amount it has to pay them.
What the bill does
Under the bill, most workers’ contribution rates would rise from 8.66 percent to a capped nine percent in July. The taxpayer-funded employer contribution rate would rise from 11.56 percent to 13.56 percent. Employer contributions would increase one additional percentage point every year thereafter until 2023.
The bill would also lower the assumed rate of return from 7.5 percent to 7.25 percent.
Included are a few nips and tucks to the retirement system’s governance structure, most notably those that would reduce the state treasurer’s influence and expand influence by House and Senate leaders.
What it doesn’t do
National pension experts have said the plan’s targeted rate should be between three percent and six percent, reflecting a deficit of up to $50 billion. This would align with rates prescribed by economists, corporations and ratings agencies.
If experts are right, the bill will not prevent retirement system officials from understating the extent of the plan’s debt.
The plan has averaged a 4.66 percent rate of return over the past 10 years. The Public Employee Benefit Authority expects returns to hover around four percent for the next several years before rebounding to 7.25 percent.
South Carolina’s retirement system isn’t unique. Understating public pension liabilities is a nationwide problem.
Connecticut, for instance, has one of the worst-funded plans, according to a researcher at George Mason University. Its debt is approximately $22 billion.
“But these official metrics actually understate the extent of the problem because they are based on optimistic assumptions,” Mark J. Warshawsky said.
“Moreover, conditions are continually worsening — funded status has declined, and required contributions from the state have increased rapidly. “
This description echoes warnings to the legislature by national pension experts about the long-term health of South Carolina’s public pension.
Additionally, lawmakers’ plan would fail to phase in an individual 401(k) type of plan instead of maintaining a risky pension long-term.
A House-Senate conference committee in April struck from the bill a provision by Sen. Tom Davis, R-Beaufort, to transition the system to individual plans once the pension reaches solvency.
Pension advocates have decried individual plans, calling them risky.
But public pensions have moved in recent decades toward riskier investment strategies aimed at yielding higher returns and meeting obligations, according to an April report by Pew Charitable Trusts.
“The volatility inherent in public funds’ investment strategies can be seen in more recent results as well, with large funds posting fiscal year gains of over 12 percent in 2013 and 17 percent in 2014, but only 2 percent in 2012, 4 percent in 2015, and 1 percent in 2016,” the report states.
South Carolina’s retirement system was almost fully funded in 1999. Today the system is approximately 60 percent funded.
Officials have rejected the private sector’s approach to retirement plans. I can’t imagine a pension will be available to state workers of my generation without a hefty bailout by taxpayers.
By the numbers
–$28 billion—the amount of assets in the pension
–$20 billion to $30 billion—the unfunded liability range, according to state officials
–$2 billion—the contributions entering the retirement system as of 2016, compared to the $3 billion paid out by retirement system officials
–30,000—the number of retirees added to the system from 2009 to 2015, even as approximately 6,000 contributing members left the system