Retirement is still a few months away for Byrnes High School biology teacher Teresa Schiltz, but she’s looking forward to the day when she can travel to Europe after a rewarding career.
Like thousands of other teachers, Schiltz, 56, has paid into and earned a pension over the years — a nest egg for retirement, and modest compensation for turning down a more lucrative career in private industry when she was younger.
“I look at my pension as the reward in the end for giving my life to education for the lesser salary I received,” she said.
But like many of the 321,000 retirees and active participants in South Carolina’s retirement system, Schiltz is concerned about reports that the system has a $21.3 billion debt that is expected to reach $23 billion soon.
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Experts say workers are likely to see more taken out of their paychecks to shore up the struggling system, and employers will likely be asked to increase their contributions to the system, too. And, some state employee groups say, that will hurt recruitment and retention for critical state jobs such as teaching and law enforcement.
“The state has been aware of this long-term underfunding (of the pension system) but has chosen to ignore it and to continue to create billions of dollars of debt that must be paid by the taxpayers and public employees,” said state Treasurer Curtis Loftis. “This debt is a hidden tax.”
How we got here
Loftis said poor investment choices and underestimating the number of retirees who are living longer “have left the retirement system in an underfunded, debt-laden position.”
Up until 17 years ago, the pension system was nearly debt-free. When it was set up in 1945, the state’s Retirement Systems Investment Portfolio invested only in domestic fixed income. That changed in 1997, when voters approved a referendum allowing pension funds to be invested in equities, or stocks.
In 2005, the S.C. Retirement System Investment Commission was established. Up to 70 percent of the plan was allowed to be put into equities and stocks.
Then in 2008, the market crashed, delivering a huge blow to pension systems nationwide.
Still reeling from the recession four years later, the Legislature lowered the expected return on investment from 8 percent to 7.5 percent, and lawmakers limited cost-of-living increases for retirees. Meanwhile, workers and employers continued to contribute more funds.
Yet the deficit kept growing, to today’s estimated $21.3 billion.
More retirees are now collecting benefits than are paying in. In 2000 there was one retiree for every three active members. Today there is one retiree for every 1.4 active members.
“Money is paid out faster and the ballooning net pension debt of $21.3 reflects that drawdown,” Loftis said.
The plan once topped $30 billion in assets, but ended fiscal year 2016 with only $28 billion, Loftis said. In a few weeks, $1.7 billion in losses from this fiscal year will be added to the debt, making it $23 billion, Loftis said.
Loftis and other state officials blame the Retirement System Investment Commission, which makes all investment decisions. Returns are earning nowhere near the expected 7.5 percent. On top of that, hundreds of millions in hedge fund fees have been paid out.
Giving more, getting less
The state agency charged with overseeing the retirement system — the S.C. Public Employee Benefit Authority (PEBA) — states that everyone in the system will receive what they are owed, one way or another.
“The system’s trust funds have the money to pay benefits that are now due, and there is a statutory and constitutional mandate to ensure that funding will be in place to pay future benefits as well,” said Peggy Boykin, executive director of PEBA.
The revenue side has three components: Employees, employers and returns from investments. By law, when investments underperform, contribution rates for employees and employers are raised. If the funds overperform, then in theory contribution rates should decrease. That hasn’t happened yet, officials said.
“The answer to this deficit is not on the backs of our state employees,” said Carlton Washington, executive director of the S.C. State Employees Association.
In June, the State Fiscal Accountability Authority approved a 0.5 percent increase in employee and employer contributions.
Employees now contribute 8.66 percent of their salaries, up from 6.5 percent five years ago and above the national median of 5.98 percent.
There also are 10,000 fewer state employees today, even though the state’s population has grown from 3.5 million in 1995 to 5 million today.
“As pension contribution requirements go up, overall compensation goes down and morale suffers,” Washington said. “Many workers are leaving for private-sector jobs where they can make 15 to 20 percent more to support their families.”
Counties and schools are also grappling with the rising costs.
Nearly 8,000 local government and school district employees in Spartanburg County are contributing to the pension plan, and their employers are paying tens of millions of dollars into the system.
Spartanburg County budgeted $7.86 million this year in pension contributions for some 1,500 full- and part-time government employees.
“State pensions used to be an incentive for government workers — a generous retirement to make up for paychecks that were often less than in the private sector,” said Spartanburg County Councilman Justin Bradley. “Instead, our county and state employees are getting more and more taken out of their paychecks in exchange for diminishing returns in the pension funds.”
Retirees now receive an average income of $19,000 a year and receive only a 1 percent cost of living increase each year. That rate was reduced from 2 percent a few years ago, and some lawmakers are thinking of cutting it to zero, Washington said.
What lies ahead
Aware of the problem, the state Legislature this year created the Joint Committee on Pension Systems Review, tasked with identifying the cause and proposing a solution.
State Sen. Kevin Bryant, R-Anderson, a member of the pension panel, said solving the problem is as important as fixing the state’s crumbling roads and bridges. He called the pension crisis “the state’s biggest problem of the decade.”
The agency in charge of investments is telling lawmakers that it is committed to improving the returns.
Michael Hitchcock, director of the Retirement System Investment Commission, said “the RSIC has owned its partial responsibility for the unfunded liability deficit.”
“Over the period of time we have underperformed our peers, that’s something we’ve worked on over the past year to rectify and improve upon that rate of return,” he said in August.
Washington said one way to eliminate the multibillion-dollar deficit would be to eliminate tax exemptions that now exist for certain businesses.
“Last year we took in $2.4 billion in sales tax, but we exempted $3 billion,” Washington said. “If we remove that exemption for six years” then the deficit is eliminated, he said.
“The bottom line is the General Assembly and State Fiscal Accountability Authority need to come to the table with the same attitude they’ve come to the table with the farmers and road system,” Washington said. “As leaders of this state, they need to act responsibly. This whole notion of asking employees to pay more is absolutely not responsible.”
With so much uncertainty surrounding the pension plan’s future, some state employees are opting to go with an alternative plan the state began offering in 2012.
The State Optional Retirement Program (State ORP) is like a 401(k). The employee still has to contribute 8.66 percent, but can select one of four vendors. Employees also can control how their funds are allocated.
State Comptroller General Richard Eckstrom said the ORP, like a 401(k), provides employees with greater returns in a strong market, or greater losses in a down one. The plan also can be carried with an employee to another job or rolled over into another plan — a plus for those who don’t intend to remain state employees for their entire career.
“It’s 100 percent vested,” Eckstrom said.
On the downside, the ORP is not guaranteed by the state, as the pension plan is.
From the state’s perspective, the two options are nearly a wash, according to Eckstrom. If more workers opt out of the state plan in favor of the ORP, the drop in revenue for the state plan eventually will even out because fewer employees will be drawing on the funds, he said.
Eckstrom said the Legislature is on the right track by creating the special pension panel.
“The bad news is we do have a massive problem, there’s just no way around it,” Eckstrom said. “If there’s any benefit of having a massive problem, it’s given us the good news that for the first time the General Assembly is accepting this is a problem. They just can’t ignore it anymore.”
State employee contributions to plan/each paycheck
2010-11: 6 percent
2011-12: 6.5 percent
2012-13: 7 percent
2013-14: 7.5 percent
2014-15: 8 percent
2015-16: 8.16 percent
2016-17: 8.66 percent
Source: S.C. Public Employee Benefit Authority (PEBA)