South Carolina’s pension fund problems are making headlines across the state. We can’t figure out why, since $16.8 billion dollars (and increasing!) in unfunded liabilities is clearly a sustainable and miniscule amount of debt, but we’ll go ahead and explain the issue and proposed solutions with the help of emojis.

There are five pension funds managed by the state, and lawmakers are currently focusing reform efforts on the two largest systems.

The largest is the South Carolina Retirement System.

This fund benefits teachers, public university faculty, and employees of state agencies and local governments. 

The other is the Police Officer’s Retirement System.

 This fund benefits police officers and firefighters.

The pensions are funded by employee and employer contributions and investment returns.

10% of the state’s population is contributing to or a beneficiary of a PEBA retirement plan.

A healthy pension should have an 80% funded ratio, where at least 80% of future payment obligations are covered by available funds.

South Carolina’s funded ratio as of 2015 was 62%.

This means nearly 40% of future payments are currently unfunded!

Unfunded liabilities are officially at $16.8 billion and continue to rise. This is an increase of $2.8 billion since 2012 when Act 278 and other reforms were implemented.

Why is our pension fund suffering?

Investments in stocks have yielded poor returns. The budget assumes returns of 7.5% but actual returns have been under 5% for the last decade.

Expenditures from pension funds have increased with cost-of living increases and early retirement programs.

Fewer workers are employed so fewer wage earners are paying into the system, while at the same time an aging population means more people are taking out retirement benefits.

SCRS is currently receiving around $2 billion in contributions and paying out $3 billion each year before investment returns. Given how low returns have been, this is clearly an unsustainable ratio.

The state’s actuary recommends that increasing employer contributions would be an efficient way to increase pension funds.

By law, the difference between employee and employer contributions must not exceed 2.9%.

The current contribution rates are 8.66% of salary for employees and 11.56% of an employee’s salary for employers. While the employer contribution is close to the national median, the employee contribution is far above the national median of 5.98%.

As public agencies are funded by tax dollars, any increase in employer contributions will mean increased taxes or cuts in services.

In fact, State Treasurer Curtis Loftis announced that there will likely be tax hikes.

South Carolina has a tax-climate very friendly to individual tax-payers, so it’s likely that this tax burden will be shifted to businesses via taxes and other fees.

If the legislature keeps waiting to address the problem, our unfunded liability woes will only grow.

We encourage the legislature to act quickly to address pension shortfalls, and to ensure that any tax increases don’t disproportionately affect the business community.

Sources 

SC PEBA

“State of South Carolina Comprehensive Annual Financial Report (CAFR) For the Fiscal Year Ended June 30, 2015: Basic Financial Statements”

“SOUTH CAROLINA RETIREMENT SYSTEM (SCRS) ACTUARIAL VALUATION REPORT AS OF JULY 1, 2015” Gabriel Roeder Smith and Company.

“Estimated Financial Condition of Retirement System as of July 1, 2016”, presented to the SC Legislature Joint Committee on Pension Systems Review on August 30,2016

Cassie Cope. “SC Pension Fund Deficit Increased by $1.4 Billion”. The State. August 30, 2016. http://www.thestate.com/news/politics-government/article98892092.html