Emoji Explains: Why the South Carolina Pension System is a Mess

Posted by: Michelle Rash on Monday, September 26, 2016

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

 

Comments

5 comments on "Emoji Explains: Why the South Carolina Pension System is a Mess"

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Devin Schumacher on January 2, 2017 at 1:48:56 pm said:
Thanks for sharing such valuable information to the Chamber. I agree with your opinion.

Devin Schumacher, Owner
SEO Firepower - Greenville
http://seofirepower.com/greenville/
Christopher Gaines on October 1, 2016 at 6:48:49 am said:
Thanks to the Chamber for posting this information. Thanks to the few elected officials like Treasurer Loftis that have the courage to stand up to the system and work for the people.
Sam Griswold on September 29, 2016 at 4:24:19 pm said:
I really wish people like our State Treasurer would stop explaining what the problem is. We know what the problem is. Why don't you get specific with SOLUTIONS? Or do you even have a clue what they are?
Heyward Stuckey on September 28, 2016 at 11:15:28 pm said:
The Dow Jones Industrial Avg. is up 57% (11, 679 to 18,339) in the ten years preceding today, Sept. 29. The Bond Market has also been experiencing a bull market with the steady decline in interest rates. Why then have the investments of the SC Retirement Fund been "under 5% for the last decade?" Would it be reasonable to assume that those officials in charge of investing the retirement funds, and I understand their salaries and bonuses are substantial, are basically overpaid incompetents?
Curtis Loftis on September 28, 2016 at 5:05:52 pm said:
Congratulations, this is great work! Presenting complicated information in a manner that is understandable is not easy to do but you have done it very well!

For the record, I am a low tax/small government guy. I speak about higher taxes only because the decisions made by others over the last decade present a "math problem" that can only be solved with higher contributions from employers (taxpayers) and employees. This is regrettable and it is the reason why I have fought the system for the last 5 years in an effort to stem its increasing debt. However, the powers that be have refused to budge and therefore the system is continuing to deteriorate.

Lastly, each year that the retirement system operates in it present condition adds approximately $1.5 billion to the debt. It is imperative that the system be fixed this year and not be pushed off for 2 or 3 years. Adding an additional $3 to $5 billion dollars of debt onto the backs of our citizens is simply not an option.
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