There is somewhat of a rush to judgment about how best to reform the state retirement systems, with a heavy bias toward replacing defined-benefit pensions with individual 401(k)-type programs. There are many factors to consider, including the important viewpoints of the impacted employees.
Sen. Tom Davis, R-Beaufort, recently wrote: “The public-employee pension system is turning out to be a classic case of concentrated benefits and dispersed costs, a phenomenon which favors recipients of government payments at the expense of the average taxpayer.”
This theme ignores a fundamental reality. Pension system employees certainly benefit in the current system, but they also contribute — twice! First, through their payroll contributions, and then with their tax dollars.
Yes, public employees are taxpayers, too. And most fall within Sen. Davis’ category of “average taxpayer.”
Consider that each “public employee — average taxpayer” pays 9 percent of salary, as of July 1, to his/her pension account. Police officers and firefighters now pay 9.75 percent, an assessment that has been increased three times since 2015.
Local government employers must now pay more, too, and this is the “taxpayer” contribution. For a typical employee, the employer assessment is 13.56 percent of salary. For police officers and firefighters, the employers must pay 16.24 percent of salary. This employer contribution will rise 1 percent per year for the next five years.
With so many increases, take-home pay for public employees has declined. Taxpayer burdens have grown. And the average state retirement pension in South Carolina remains around $20,000 a year.
Yes, the system is broken and must be fixed and steps are being taken. The path forward should be paved with equity for the public employees-taxpayers.
Gov. McMaster in an April 22 Post and Courier article noted “the [pension] systems plans around the country that are working well have the employees and the taxpayers paying roughly the same amount, or certainly the taxpayers do not pay more than the employers.” Sen. Davis also makes this point in his recent opinion article: “A fair rule of thumb would be that government workers should contribute at least as much toward their retirement as taxpayers.”
However, according to a recent Wall Street Journal article, the top 10 pension funds have only two evenly matching contribution formulas, Wisconsin (ranked No. 2) at 6.7 percent and South Dakota (ranked No. 1) at 6 percent. The seven other best pension systems were, in order, Washington, North Carolina, Oregon, Tennessee, Idaho, Delaware, New York and Florida. Each of these mandated higher employer contributions. South Carolina’s rank was 33rd.
The large question framing this debate is, of course, why did our state retirement system have to raise the employer and employee rates three times since 2015? Yes, there is a crisis, but the default solution need not be exclusively that public employees should pay more.
Public employees-taxpayers understand that there are many reasons for this crisis. But the issue is more complex than a simple rush to individual retirement accounts. In fact, the push for a 401(k)-type retirement system as a win-win option for employers and employees is not a fool-proof policy. Anyone doubting this should read the National Public Pension Coalition’s case study “Three states that abandoned their pensions — and suffered the consequences.”
This February 2017 study documents the disastrous experiences of Michigan, Alaska and West Virginia after their switches to individual retirement systems. 401(k) proponents will argue that all pension systems throughout the country are failing, yet according to the Council of State Governments, pension funds across the country are 80 percent funded and 87 percent of these plans make their annual contributions.
There is plenty of research and experience that warn us that individual retirement accounts are not fair and equitable solutions for repairing defined benefit retirement systems. This body of information provides ample arguments that individual retirement accounts over time are less productive and more costly — to the employee and the employer.
Other states have conducted a cost base analysis and found a 401(k) impractical and ultimately more expensive to the taxpayer and less beneficial to the employee. If South Carolina policy-makers have research that suggests this march to individual retirement accounts is better than repairing the existing system, it should be published for all to consider. Public employees, as beneficiaries and as taxpayers, have a distinct interest in this discussion and can provide an informed opinion.
The default position should not be this simplistic rush to transform the system to individual retirement accounts, but to do what is best to assure the continuity, the productivity and the highest possible morale of public employees. In the long run, that is the best investment for taxpayers.
Capt. Joseph Carey is a 20-year veteran of the North Charleston Fire Department.