South Carolina Pension Reform Analysis

Commentary

South Carolina Pension Reform Analysis

Over the past decades and a half, the South Carolina Retirement System (SCRS) has experienced substantial growth in unfunded pension liabilities. Between 2001 and 2016, unfunded liabilities increased by more than $18 billion, with a funded ratio today of 59.5%.

In October 2016, we presented actuarial analysis of SCRS to the Joint Committee on Pension Systems Review that examined how this unfunded liability problem has been created, forecasted what is likely ahead for the pension plan without changes, and offered a framework for considering solutions (see below).

In February 2017, we provided the Joint Committee with a letter analyzing the proposed funding policy and governance changes for SCRS and PORS (see below).

Ultimately, we find that while the proposed changes to funding policy are steps in the right direction, they are not enough to put South Carolina on a path to retirement system solvency.

The next phase of pension reform is to develop a new retirement plan for future hires, and then to find the resources necessary to provide SCRS and PORS with the funding necessary to ensure their future.

Learn more about SCRS pension reform —

 

Summary Information

The South Carolina Joint Committee on Pension Systems Review has proposed funding policy changes that would lower the assumed rate of return to 7.25% (and possibly eventually down to 7%), reduce the years in the amortization schedule, increase employer contributions as defined in statute, freeze employee contributions at 9%, and adopt various governance changes.

Our analysis indicates that the proposed funding policy changes alone would not create a path for sustainability or solvency. Overall, we find that SCRS and PORS will be better off with the proposed changes than with the status quo. However, if all that is accomplished is adoption of the proposed funding policy and governance changes, the goal of achieving comprehensive pension reform for SCRS and PORS will not be achieved — and members of the General Assembly will find themselves returning to confront the same challenges a few years down the road.

1. Proposed Funding Policy Changes Will Only Slow the Growth of Unfunded Liabilities, Pension Debt Will Continue Increasing

The Joint Committee’s proposed changes will mean increasing contributions into SCRS — which is a good policy choice for the defined benefit plan that has failed to fully account for the cost of providing retirement benefits for over a decade. However, the changes are not enough to put the plan on a path to solvency: Consider that the average actual investment performance for SCRS is well below even 7% returns. The 10-year average is 4.4%. The 15-year average is 5%.

PEBA’s estimates for the change in contribution rates under pension reform options have consistently assumed that the actual returns until 2021 will be just 4%.  And many market forecasts suggest average returns for pension plans like SCRS are likely to be around 6% (or less) in the coming decades.

Thus, the proposed changes will not be enough to stop the growth of unfunded liabilities though; the increased contributions will only be enough to slow the growth of pension debt.

2. Lowering the Assumed Rate of Return to a Realistic Rate Today Would Crowd Out Other Budgetary Goals

A more realistic and reasonable long-term investment return assumption for SCRS would be between 4% and 6%. However, this more accurate accounting recognition of the costs of providing retirement benefits will mean increasing the contributions today, leaving less room in the budget for other public goods and services. South Carolina can phase in the budgetary costs of improving accounting methods for pension benefits to avoid overwhelming today’s budget, but it should be clear that unfunded liabilities will still be growing.

3. Creating a New Plan Will Slow Down the Growth of Unfunded Liabilities

Every new person hired into SCRS means increasing the amount of promised pension benefits that are exposed to the imperfect funding methods and assumptions used by the plan.

It is reasonable to phase in good funding policy over time, but it is also reasonable to stop adding employees to the existing plan that isn’t properly accounting for the costs of benefits.

If the proposed funding policies are adopted it is likely that unfunded liabilities will grow to around $35 billion by 2040 — less than without changes, but still more than today’s $18.6 billion. However, if a new plan is created for future hires that is fully funded from inception, then unfunded liabilities will only grow to about $32 billion by 2040.

Anthony Randazzo

Anthony Randazzo is a senior fellow at Reason Foundation, a nonprofit think tank advancing free minds and free markets.