Adam Crain

Not Finished with Pension Reform Yet

Tax & Budget
May 12, 2017

Adam Crain

One in nine South Carolina residents are served by the Palmetto State’s public pension plans. The woefully underfunded system was the topic of much debate in the General Assembly and at the end of April, Governor McMaster signed a bill raising contribution rates into the system for both employees and employers. Because taxpayers are the employers of public officials, the bi-partisan bill signed by Governor McMaster resembles the start of a tax-payer bailout of a system allowed to go belly-up by bad leadership and risky investments.

The new law leaves taxpayers with a tab of over $800 million dollars by 2023. State employees are required to contribute an additional $40 million annually as well.

Shoring up the state’s pension system is imperative and H.3726 recognizes that reality. But the General Assembly has much more work to do in order to protect taxpayers and fulfill the promises made to state workers.

Hopefully, leverage for reform has not been lost now that a short-term “fix” has been signed into law.

Like rebuilding our roads, rebuilding the state’s pension fund will require major structural changes, not simply old tricks masked in new pieces of legislation.

The state’s next step must be to seriously consider moving away from the defined-benefit model and toward the defined-contribution model. The differences are striking and the results speak for themselves.

The key distinction between defined-benefit and defined-contribution is that a defined benefit plan promises a specific pay-out to a worker at retirement, no matter how much money is actually in the pension fund or how pension investments performed. Under a defined contribution model, the employer makes agreed upon contributions into a worker’s retirement plan, instead of promising a future benefit.

Interestingly, it’s a “blue state” that is leading the way in modeling how to transform chronically underfunded pension systems without raising taxes. Rhode Island corralled the political factions, heard from all appropriate parties and eventually passed the Rhode Island Security Act of 2011. The law created a hybrid defined-benefit/contribution plan, raised the retirement age, froze cost-of-living adjustments until the pension system was at least 80% funded and extended the amount of time the state had to pay off liabilities.[i]

Structural reforms like the ones made in Rhode Island are the path to pension solvency for South Carolina. Final legislation might look different than Rhode Island’s, but the point is there needs to be a plan with structural reforms included so the Palmetto State is able to both honor the promises we’ve made and protect taxpayers from paying for government’s mismanagement.

[i] Reason Foundation: Anthony Randazzo, Pension Reform Case Study: Rhode Island