The Legislature made an important stride two years ago when it agreed to pump more money into the state pension system, but it stopped short of shifting new employees to 401(k)-style retirement plans, a move most experts agree is the only way out of a multibillion-dollar hole that taxpayers would ultimately have to fill.
Though public agencies and their employees are plowing more money into pension funds, a process that will take five more years to be fully phased-in, unfunded liabilities — the projected gap between assets and future payouts — stood at an incredible $25.47 billion at the end of fiscal 2018. That’s closer to an abyss than a hole.
As The Post and Courier’s David Slade recently reported, that means state pensions are about 54 percent funded, a worse position than during the Great Recession in mid-2009 when they were 68 percent funded. This despite pension investments beating an earnings goal of 7.25 percent last year.
As higher contributions are phased in, the results should improve over the next few years if investments continue to grow. But the situation will almost certainly worsen if the markets tank. Either way, the pension system as structured will not be sustainable in the long term.
That’s why lawmakers need to give serious consideration to bills from Sens. Tom Davis, R-Beaufort, and Sean Bennett, R-Summerville.
Sen. Bennett’s bill would close the current retirement system to new employees by July 2020 and shift them to a “shared-risk defined benefit plan” or an alternative dubbed “WealthBuilder.” The first is similar to the existing pension plan, but employees would share some risk, whereas the state (i.e., taxpayers) now shoulders all the risk. The other option is a defined contribution plan like a 401(k).
Sen. Bennett called the legislation “the logical next step for a sustainable plan moving forward” that is fair to employees and taxpayers. He was optimistic about reforms passed in 2017 but acknowledged that, “even in a perfect world,” it would take 25-30 years for the pension plans to become fully funded.
Sen. Davis unsuccessfully championed a hard shift to a 401(k)-style plan two years ago. “That was the time to get it done when we had all the stakeholders at the table, and they (public employees) needed something from us,” he said. “We ate the dessert and put off the vegetables.” That is an apt description.
His latest bill mandates that all public employees be shifted to a defined contribution plan once the pension system becomes “actuarially solvent,” meaning once assets and projected earnings match retirement liabilities.
At least 15 other states have abandoned pensions because, as The Reason Foundation put it, “Traditional plans are expensive, unpredictable and unsustainable in the long run, putting virtually no risk on the workers or retirees because taxpayers must make up any shortfalls.” That is a flawed, outdated model.
About 591,000 South Carolinians, including 142,652 retirees, are enrolled in state pension plans. By the time the 2017 reforms are fully phased in, taxpayers will be underwriting pensions to the tune of about $820 million per year. That’s not expected to change, but lawmakers could soften the impact by increasing the retirement age. Even if public employees were shifted to a 401(k)-style retirement plan tomorrow, the state would still be obligated to vested workers and retirees for decades to come.
Sooner or later, the existing pension system will need to be shut down and public employees moved to a more sustainable model. Though further pension reform may be complicated and politically unappealing, it’s important because it affects all aspects of state government, including fiscal flexibility in dealing with other critical issues such as improving schools and raising teacher salaries.
The legislation proposed by Sens. Bennett and Davis is a good place to restart negotiations.