Adam Crain

2 Steps Toward Pension Reform

Tax & Budget
December 19, 2016

Adam Crain

What has historically bad leadership, risky investment strategies, and faulty logic meant for South Carolina’s pension system? According to Sen. Kevin Bryant (R-Anderson) it means the “state’s biggest problem of the decade.”

Recently Charleston’s Post and Courier wrote a scathing article entitled “South Carolina’s Looming Pension Crisis” about the systemic failures that dot the long road to our current pension system landscape. Experts estimate that South Carolina only has 46 cents for every dollar the state currently owes in future promises.

The article reports:

“Years of ill-timed investments and a refusal to abandon questionable strategies have left South Carolina’s government pension plans on the ropes, with a massive funding gap that threatens promised benefits to future retirees…

How did we get here? First, state lawmakers repeatedly changed laws to encourage more aggressive pension investments, often at what proved to be the worst times to do so. Then, as the pot of pension money dwindled, the state’s investment managers chased increasingly expensive strategies. The result: South Carolina pays some of the nation’s highest costs among state pension plans, only to get results that were dead last over the 10 years ending in 2015.

‘Our attitude from 2006 to 2013 was, we wanted to be on the cutting edge of investment diversification and financial theory, but we were on the bleeding edge,’ state Treasurer Curtis Loftis said. ‘We have lost so much money the state will be lucky to get out of it.’

Despite that poor track record, employees of the Retirement System Investment Commission (RSIC) collected $1.4 million in bonuses in 2013. Following criticism, the RSIC no longer pays bonuses, but the top 10 officials on its full time staff still earn an average of $196,397 – $90,000 more than Gov. Nikki Haley is paid to oversee the state…

Despite several leadership changes at the RSIC, South Carolina has continued to pay some of the highest investment fees of state pension plans, while repeatedly falling short of investment goals and lagging behind even simple, inexpensive mutual funds…

What South Carolina has now is the distinction of paying some of the highest costs in return for some of the worst results.”

It is a pretty grim picture, but South Carolina’s fiscal future does not have to be derailed because of it.

The first agenda item on the way to fixing the problem should be to hire an independent actuary to study the pension liability. Estimates of the unfunded liability range from $11 billion to $75 billion because of different assumptions on rate of investment returns.

After SC gets a handle on the numbers, there are proven reforms such as those successfully enacted in Rhode Island that can put South Carolina on a solvent path forward. One of those reforms would be to consider moving from a defined benefit model (in which the state pays retirees a set monthly benefit) to a defined contribution plan (which is portable and allows both the state and employees to contribute into a 401K-type plan) for new state workers.

There’s no easy fix, but South Carolina cannot afford to renege on the promises made to current state workers or fail to reform the system at large and risk crushing a future generation of tax payers.  Solutions are out there, if our lawmakers have the courage to pursue them.