SOUTH CAROLINA’S PENSION PREDICAMENT Fact Sheet March 2017
331,749
THE ISSUE
226,378
We’re not the only state facing a public employee pension problem, but we’re among the worst. According to a 2016 analysis by the Pew Charitable Trusts, South Carolina ranks 43 on state pension fiscal health.
retirees, beneficiaries and inactive employees entitled to benefits
active contributing state employees
1.46
retired or eligible for each contributing current employee - 2015 data
PENSION PLAN INCOME SOURCES: • Investment returns • Employee contributions • Employer contributions
South Carolina’s state-managed pension fund for state employees is facing a roughly $20 to $24 billion hole, depending on the estimate used. That means the fund has less than 60 percent of the assets needed to pay promised benefits. This is a crisis level liability on the state’s books.
HOW WE GOT HERE There are a host of reasons why we are in this crisis, but two of the major issues are: unfunded benefit increases and faulty assumptions. According to Pew, changes to the program between 2000 and 2015 contributed to roughly $7 billion of the hole. Meanwhile, the fund’s investment portfolio has not produced returns at expected levels. The funds’ 10 year average rate of return from 2005-2015 was 5.1 percent. That’s roughly at the median of other state employee pension funds, but falls short of the projected budgeted 7.5 percent return rate. You can blame portfolio management, poor market timing or overzealous expectations and you’d be right. Failure to contribute to the fund was not a significant factor in the gap. Over the past decade South Carolina has made 100 percent of its annual required contribution (ARC). Of course, the ARC calculation was based on the plan’s own assumptions. Research by the Pew Charitable Trusts indicates that demographic actuarial assumptions contributed very little to the overall liability.
PROPOSED SOLUTION A joint legislative committee was formed last year to devise a solution to sure up the fund. The proposal they’ve presented makes several key recommendations including:
FIVE PENSION PLANS UNDER MANAGEMENT: • S.C. Retirement System - serving teachers and state / local government employees • Police Officers Retirement System - serving police and firefighters
• Lowers rate of return expectation from 7.5% to 7.25% (with an expectation of further reduction to 7% by FY20) • Increases employer contribution by 8% over 6 years (2% in FY17, then 1% annually through FY23) • Modestly increases and caps employee contribution (from 8.66% to 9% for State Employees/Teachers, from 9.24% to 9.75% for Police/Fire)
• The General Assembly Retirement System
It’s worth noting that employee contribution levels are already significantly above the 5.98 percent national median. The proposed future employer contribution (19.56 percent for State Employees/Teachers, 22.24 percent for Police/Fire) will be nearly double the national median of 11.51 percent.
• The Judges and Solicitors Retirement System
The proposal recently passed also recommends significant governance changes to the South Carolina Retirement System Investment Commission (RSIC), a seven-member commission responsible for investing and managing all pension fund assets, and the Public Employee Benefit Authority (PEBA), an agency that administers retirement and benefits plans for nearly 549,000 current and former state employees.
(closed to newly-elected after 2012)
• The National Guard Supplemental Retirement Plan
www.charlestonchamber.net
Ian D. Scott at 843.805.3089 or iscott@charlestonchamber.org