Research & Commentary: South Carolina Pension Reform Could Be on the Horizon

Published November 8, 2016

South Carolina is experiencing serious problems with its pension fund. As the fund’s investments have continued to fall short of expectations, the state has been forced to deal with growing and dangerous unfunded pension liabilities that could leave taxpayers on the hook for billions of dollars.

South Carolina has five pension funds for public workers. The State reported in August 2016 –according to actuarial firm Gabriel, Roeder, Smith, and Co. – the unfunded obligations for the largest pension fund, the South Carolina Retirement System (SCRS), is expected to have grown by $1.4 billion over the past budget year. According to the Retirement System Investment Commission, SCRS has about $24 billion in assets and $16.8 billion in unfunded liabilities.

During a recent legislative panel, South Carolina lawmakers began discussing potential solutions for the pension problem. One of the possible reforms that emerged from the panel meeting was a hybrid plan that would maintain pensions for existing employees while placing new hires into a defined-contribution-style system, such as a 401k retirement account. Under the current system, public employees in South Carolina can choose a 401k instead of a pension, but few choose to do so.

State Treasurer Curtis Loftis argues the move to a hybrid system is inevitable. “Within the next five years, the state will have to close its pension plan to new entrants,” Loftis said after a State Fiscal Accountability Authority meeting in October 2016. “The numbers are so large now, I don’t think it can be turned around.”

The most serious problem with South Carolina’s pension system is the poor return it has earned on its investments in recent years and its unrealistic expectations for those investments. According to Peggy Boykin, executive director of the Public Employee Benefit Authority, which manages the pension fund, while the assumed rate of return set for the pension fund’s investments is 7.5 percent, the state only realized a rate of return of 1.6 percent in 2015 and less than 5 percent per year, on average, over the past decade. Pension experts recommend states use an expected investment return rate of 3.1 percent, which is based on 30-year Treasury bond yields. If the rate of return continues to fall short of expectations, the state’s pension system may be in even more trouble than is currently thought.

South Carolina also pays more than most states in investment fees. According to a study by the Maryland Public Policy Institute and Maryland Tax Education Foundation, the South Carolina Retirement System paid the most fees, totaling 1.3 percent of total pension assets.

In the short term, per-year pension payouts should be capped, the retirement age should be raised, double-dipping and benefit spiking should be eliminated, the realistic rate of return assumptions should be used, and pension systems should be protected from borrowing and fund raids.

In the long term, to protect taxpayers and public workers, South Carolina should follow the private sector’s lead and start switching workers from defined-benefit pension systems to defined-contribution plans, such as 401k plans. Defined-contribution plans give workers direct control over retirement funds and enable them to change jobs without losing accrued pension benefits. It also allows governments to budget more accurately because the benefit costs are easily predicted and managed from year to year.

If the state passes serious pension reform, South Carolina will be able to eliminate the burden of future pension liabilities, avert the pension crisis, and make budgeting more predictable.

The following articles examine state pension reform from multiple perspectives.

The Limits of Retrenchment: The Politics of Pension Reform
Daniel DiSalvo of the Manhattan Institute examines pension reform and argues states serious about keeping pension costs under control are introducing defined-contribution options or hybrid plans at a growing rate. As more states take this step, it will become less controversial and easier for other states to adopt similar reforms.

Not So Modest: Pension Benefits for Full-Career State Government Employees
Examining the benefits paid to state and local government employees, Andrew Biggs of the American Enterprise Institute argues drastic benefit reductions for current retirees would be unfair, but reforms to make public- and private-sector pensions more equitable should be on the table.

The State Public Pension Crisis: A 50-State Report Card
This 50-State Report Card from The Heartland Institute examines problems facing public pension systems, including the enormous burdens they pose in some states. The report ranks each state according to the operation and relative disposition of its pension plan and suggests ways states could solve their pension system problems.

Keeping the Promise: State Solutions for Government Pension Reform
The American Legislative Exchange Council describes the variety of pension plans governments use today and the advantages and disadvantages of each. It also provides several tools legislators can use to ensure governments can affordably fund their employees’ retirement benefits.

The Real Cost of Public Pensions  
Jason Richwine explains how to calculate the cost of public defined-benefit pension plans, compares the cost of these systems to private-sector retirement plans, and refutes two of the most common arguments suggesting public pension benefits are modest.

Research & Commentary: Public Pensions and the Assumed Rate of Return–commentary-public-pensions-and-the-assumed-rate-of-return?source=policybot
Heartland Institute Senior Policy Analyst Matthew Glans examines the problems facing state and local pension funds, how assumed rates of return affect pension fund debt, and proposals to change projected rates of return on pension fund investments.  

Fixing the Public Sector Pension Problem: The (True) Path to Long-Term Reform
Richard Dreyfuss of the Manhattan Institute examines various state pension reform efforts and recommends they shift to defined-contribution plans: “Under such plans, to which employees as well as employers may contribute, investment risk is borne by plan members, not by taxpayers. A majority of Fortune 100 companies have already adopted such plans. Only 16 percent of large companies still offer their retirees medical coverage. By sharing risks with the beneficiaries, states and municipalities would be able to devote far more of their time and resources to the more immediate concerns of today’s voters and taxpayers.”  

The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform  The Reason Foundation considers the looming crisis created by states’ continued use of defined-benefit pension plans, offering solutions and explaining why the current system is a disaster in the making.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

Whether sending an expert to your state to testify or brief your caucus, hosting an event in your state, or simply sending you further information on the topic, Heartland can assist you. If you have any questions or comments, contact Heartland Institute Director of Government Relations John Nothdurft at [email protected] or 312/377-4000.