SC’s pension debt is $40 billion, lawmakers told

South Carolina’s unfunded pension debt could be nearly twice as large as estimated — $40 billion.

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That debt has been estimated at $20 billion. But that assumed a 7.5 percent return on the pension fund’s investments.

If the state were to apply a more realistic market value rate of return — 4 percent — to those investments, the retirement system’s unfunded liabilities would grow to almost $40 billion, said Anthony Randazzo, managing director of the libertarian Reason Foundation’s Pension Integrity Project.

Randazzo told S.C. lawmakers Tuesday the pension fund has been “grossly underfunded” for years and will need to be shored up with more money.

Where that money will come from — state workers or taxpayers — has yet to be decided.

Too little money going into the pension system has resulted in billions of unfunded liabilities. The $20 billion estimate, by consultants for the state, is the difference between the amount the pension fund has to pay for the retirement benefits of state and local government workers, including teachers, and the amount it has promised to pay current employees and retirees.

In an effort to close that gap, lawmakers are looking at whether to spend more taxpayer money or take more money from the paychecks of government workers.

Lawmakers also could close the pension plan to new employees and require they take part in a defined contribution plan — like a 401(k) investment plan. In the short term, that would increase the pension system’s unfunded liability because new workers would not be paying into the system. But, in the long term, it would reduce the state’s pension costs.

Next month, the panel of lawmakers will begin deciding on the possible solutions they will propose, said panel co-chairman state Sen. Kevin Bryant, R-Anderson.

Reducing the assumed rate of return

Nationwide, states and local governments have more than $1 trillion in unfunded pension debt, according to the Pew Charitable Trusts.

South Carolina ranks 43rd in the adequacy of its pension funding and 39th in contribution adequacy, according to Pew.

The main contributors to the pension system’s unfunded liabilities include about $10 billion in interest, which ticks up as investments fail to make the 7.5 percent rate of return, and another $6 billion in under-performing investments, according to the Reason Foundation’s Pension Integrity Project.

The system’s 10-year investment return of 5.1 percent is well below the assumed 7.5 percent rate and lags nearly all other state pension funds, which averaged 6.6 percent during the same period, according to Pew.

The assumed rate of return should be reduced, said Randazzo of the Reason Foundation. But if that rate is reduced, the retirement system’s unfunded liabilities will grow to $40 billion from $20 billion. But, he added, that is a more accurate representation of what is owed.

However, if the state does not recognize the amount it owes in the long run, it will never chip away at the debt, Randazzo said.

Reduce the time of paying off the debt

South Carolina also needs a target date for paying off the debt, Randazzo said.

Currently, the pay-off date is a 30-year schedule that restarts every year. That means the state is making the equivalent of interest-only payments on the debt and will never catch up, Randazzo said.

Not restarting the pay-off date would cost the state an added $9.3 million in 2019, according the Reason Foundation. Over five years that cost would be $155.4 million, money that could come from taking more out of workers’ pay or from taxpayers.

The state should reduce the target date to pay off its pension debt, agreed state Rep. Jeff Bradley, R-Beaufort. “It saves the taxpayers of South Carolina from the potential risk of having to backstop this thing.”

If the state continues to operate without a fixed pay-off schedule, the pension debt just will become more and more expensive every year, he said.

South Carolina should pay off its new unfunded pension liabilities within 20 years, a 2014 Legislative Audit Council report recommended.

Until the pension system is fully funded, contributions by government workers and the agencies that employ them cannot be cut, Randazzo said.

Currently, state agencies pay 11.56 percent of an employee’s salary into the pension system. Employees pay 8.66 percent of their salary.

Government employee’s payments into the pension system have increased dramatically in recent years — to 8.33 percent from 6.55 percent — taking more out of their paychecks. Meanwhile, those workers have received raises in only six of the last 10 years.

This story was originally published October 26, 2016 at 9:37 AM with the headline "SC’s pension debt is $40 billion, lawmakers told."