North Augusta High School teacher Beth Hardy has both a pension and a 401(k)-style retirement plan.
Hardy has that combination of retirement options – unique for a state worker – because she taught in Georgia for roughly two decades, enrolling in the Peach State’s pension plan for teachers. Then, when she started teaching in South Carolina six years ago, she chose the join the state’s little-known Optional Retirement Program – similar to a 401(k) plan.
“I went with the option of a little more control over the investments,” Hardy said. “And I have not been disappointed.”
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Hardy’s hybrid retirement plan – a pension-style plan, which guarantees a set monthly payment to retirees, and an additional 401(k)-like option, which requires workers to be more responsible for their retirement savings – could be one of many new retirement options for state workers.
The specifics of those options will emerge starting later this month, when a joint S.C. House-Senate panel begins asking what future retirement plans for new S.C. employees should look like. Earlier this year, that same panel approved requiring more than 190,000 state workers and their employers – the state, its agencies, counties and cities – to pay more into the state’s pension system. The move was an effort to reduce unfunded billions owed to state retirees in promised benefits.
The question now, says state Sen. Vincent Sheheen, D-Kershaw, is: “Now that we’ve shored up the pension, what is the best option for the taxpayers and the retirees of this state?”
Is a 401(k) better? And for whom?
South Carolina’s current pension system is an open-ended promise of future monthly payments to state workers when they retire. Lawmakers have pledged to preserve pension benefits owed to current and retired state workers.
However, some Republican legislators – who control the S.C. House and hold a majority of the state Senate’s seats – plan to push for the state to convert its retirement system to a 401(k)-style plan for new state workers. Those GOP legislators say the current pension system, increasingly uncommon in the private sector, is too costly for taxpayers.
“We don’t know how much we’re going to have to pay them over their lifetime,” state Rep. Jeff Bradley, R-Beaufort, said of state retirees in the pension system.
In addition, the pension plan puts an unfair burden on younger and newer state workers, who have to pay more of their salaries into the system than their predecessors, Bradley says. “It’s really unfair for the newest employee to come in and pay exorbitant legacy costs in order to cause the plan to remain to be solvent.”
A 401(k) option is better because “the state’s obligation ends” with its contribution to an employee’s retirement account, Bradley says. Now, with the current pension system, the state has to make a set payment every month for as long as the retiree lives, so the state and taxpayers never know exactly how much they will have to pay out.
A 401(k)-style retirement option already exists for state workers but few – 27,432 – actively contribute to it compared with the 190,923 contributors to the pension system.
Under the S.C. Optional Retirement Program – technically a 401(a) plan – state workers and teachers are required to contribute 9 percent of their paycheck toward their retirement and the state contributes 5 percent of their salaries. (Local government workers currently are ineligible to participate in the plan.)
Hardy said the flexibility of the Optional Retirement Program has benefited her family, including her four children, ages 5 to 23, and her husband, who was diagnosed with stage 4 lung cancer in 2015.
“We do have the ability to change those investments, to be a little more aggressive in some ways, to plan for our future,” Hardy said, adding, “Those life issues that hit you are there.”
401(k) style ‘dangerous’
But moving all new state employees to a 401(k)-style plan “could be a very dangerous thing,” Sheheen says.
In part, that is because the new workers would no longer be paying into the pension system, where some of their money now goes to pay the monthly retirement checks of current retirees.
Moving away from a pension plan would entail a heavy initial cost to taxpayers, who would have to make up for the payments now made into the pension system by new workers.
According to a 2016 estimate, one proposal to move all new state workers to a 401(k)-style plan would have cost taxpayers $650 million more than the current retirement systems after five years.
However, switching to a 401(k)-style plan would have some pluses, too.
The state, for example, would have certainty about what its retirement costs would be, said Keith Brainard, a research director for the National Association of State Retirement Administrators.
“But you also lose a lot, including diminishing the ability of employers ... to attract and retain qualified workers,” Brainard said.
Recruiting and retaining workers are areas where the state and its agencies already struggle. Because of low pay, in part, 14 percent of state jobs were vacant in March.
Best of both
Hardy, the North Augusta teacher, says the guaranteed monthly payments promised by her Georgia pension provide financial security.
“It is a comfort to know that I’ve got that pension in addition to ... this 401(k)-type plan that gives me some added control over where my money goes,” Hardy said.
Other states have created hybrid pension-401(k) retirement plans.
In Utah, for example, the public employer – the state, county, city or school system – pays 10 percent of a worker’s salary into a hybrid retirement plan.
Most of the money – 8.4 percent – goes into Utah’s pension system. However, 1.6 percent goes into a 401(k)-like plan.
But keeping any form of a pension system could face Republican opposition in South Carolina.
Rep. Bradley, for example, says retaining a pension system as part of a hybrid option could expose taxpayers to future unfunded obligations.
It was those unfunded future obligations – $20 billion worth – that forced legislators to act this year to bail out the pension system.
In the second round of pension talks, lawmakers hope to prevent a future bailout by S.C. taxpayers.
State Rep. Bill Herbkersman, a Beaufort Republican who co-chairs the special panel with Sheheen, echoed the Democrat about the mission of the next phase of pension reform: “What is best for the state employees and what is best for the state taxpayers?”
SC retirement options
S.C. Retirement System: South Carolina has five pension systems for state workers. The largest is the S.C. Retirement System, in which state workers, teachers and local government workers participate. That pension-style plan guarantees a set monthly payment to workers when they retire. Employees in the plan contribute 9 percent of their pay. Their employers – state agencies, counties, cities and school systems – contribute 13.6 percent of their pay.
Optional Retirement System: South Carolina also offers a 401(k)-style plan to public-sector workers. The Optional Retirement Program plan puts more of the responsibility of saving for retirement on state workers. The plan requires workers to contribute 9 percent of their pay, and the state contributes 5 percent.
Who is a member of what?
Thousands of South Carolinians were enrolled in the state’s retirement systems as of July 1, 2016
190,923 public-sector workers were active members in the S.C. Retirement System, which is open to state workers, teachers and local government workers
26,651 law enforcement officers are active members the Police Officers Retirement System, which is open to state and local law enforcement officers
27,432 state workers and teachers were enrolled into the State Optional Retirement Program, a 401(k) type program that is not open to local government workers