The South Carolina state employee pension system is in trouble.
We’re not alone. Nationally, there is a $1 trillion shortfall in state pension funds.
The South Carolina General Assembly cannot do anything about other states’ funds, but we can and should fix our own. South Carolina’s pension program cannot continue to function as it has for the past decade and we can’t allow bad practices to drag our system down.
As a state, we have over-promised and under-performed. In doing so, we’ve created an unfunded liability: the difference between what the state must have to uphold its obligation to retired employees and what the state has in its pension fund.
To avoid a crisis requiring taxpayer bailouts, it is incumbent on the General Assembly to act now to right the ship.
There is some good news for the South Carolina Retirement System. The state and state employees are currently contributing enough to fix this funding deficiency over the next 30 years if the fund earns its benchmark of 7.5 percent. If not, the unfunded liability grows.
There are a couple of issues of concern.
First is that the fund has failed to meet its benchmark return.
Second, the current plan to reduce the unfunded liability is akin to making the minimum payment on a credit card for 30 years. To have a healthy system we must reduce this debt sooner and we need to pay now to avoid paying much more later.
A few states have successfully reformed their pension systems. We can and should learn from them.
Some states have adopted debt-reduction plans to pay their debt in full as quickly as possible. Others have used a portfolio of common-sense policies to put their house in order. These policies include adopting defined contribution plans and hybrid defined benefit and defined contribution plans that give greater control to the employee, restricting cost of living adjustments, increasing state contributions, and pursuing more modest but realistic expected returns on investments.
We can and should follow these states by pursuing common-sense policies to reform our pension fund before it is too late.
The core issue for us is the size of our unfunded liability. The unfunded liability is at least $20 billion and may be as much as $40 billion.
The 7.5 percent returns required of our state pension fund managers is partially fueling our unfunded liability; this legislatively-set benchmark is unrealistic and needs to be adjusted lower by the General Assembly.
For 10 years, our rate of return has averaged 5.06 percent. We must adjust our expectations and our calculations. This is our reality.
Some are reluctant to change our rate of return assumption because it increases our unfunded liabilities. That is accurate. Right now, we are set to pay off the unfunded liability over 30 years. Our plan should strive to reduce the number of years to pay off the unfunded liability. Anything less is not addressing the problem head on.
To do that, the House plans to introduce a pension reform bill that will propose common-sense reforms to make our state employee pension fund stable and reliable. This is a complex issue with lots of moving parts and it will require disciplined study and nuanced policy.
House Speaker Jay Lucas has assembled a task force of House members, including myself, who will consider reasonable and serious reforms. Everything must be on the table.
You elected us to do the right thing. From my vantage point, doing the right thing is working to get us back on a properly-funded future. I will work with my colleagues in Columbia to see to it that we perform the due diligence this complicated issue demands and produce the kind of nuanced policy that satisfies the needs of the state’s taxpayers and the state’s employees. I know focusing on this issue now will save tax dollars in the future.
State Rep. Jeffrey A. Bradley of Hilton Head Island represents Hilton Head and Daufuskie islands.