S.C. lawmakers eventually could walk away from the state’s pension plan.
In passing a fix to the state’s underfunded pension system, the state Senate last week approved closing the current retirement system to new employees once it is made financially whole. But that could take about 30 years, officials estimate.
Still, lawmakers are planning to explore changing the retirement options for state and local government employees, including teachers. A special panel already has agreed to look at who is eligible to join the pension system and possibly change the plan.
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Advocates for state employees oppose closing the retirement system to new employees. They say public-sector workers covered by the pension system — state, city, county and school system employees — do not make enough to benefit from a 401(k) style plan, used by many businesses.
State Sen. Vincent Sheheen, D-Kershaw, said the Senate’s vote to close the pension system to new employees once it is stabilized is meaningless. Fully funding the system will take decades, he notes, adding retirement options could be vastly different in three decades.
Sheheen said the real issue is: Who is going to bear the retirement risk for state employees?
Lawmakers will have to decide, Sheheen says, whether taxpayers should continue to share the risk of state employees’ retirement —as they do now with the existing pension system, which pays out a specified benefit, depending on a workers’ pay and years of service — or shift that risk to employees though a 401 (k) style plan, where retirement benefits largely will depend on how much a worker has saved.
Closing off the system?
Libertarian-leaning state Sen. Tom Davis, R-Beaufort, says maintaining the current pension system is not feasible.
Many Fortune 500 companies no longer offer pension plans, Davis noted. “It just costs too much money in the long run to offer that sort of a benefit,” he said, noting many companies now offer 401(k)-style programs.
With that in mind, Davis pushed for the Senate to close eventually the pension system to new employees.
A shift to a business-like 401(k) system would be just the latest rift in the unwritten employment pact with public-sector workers.
According to that pact, employees agree to work for government knowing they will be paid less than their private-sector counterparts. But, in return, they largely are immune from job cuts and get good benefits, including a good pension. They also get the psychic income of working for the public good.
But after 14 years of governors who ran against government saying it was bad — and, by inference, government workers are bad, too — that pact is shattered.
Since 2000, state government has cut its employment by nearly 8,000. Meanwhile, state workers have received few raises, paid more for their benefits and, now, will pay more of their salaries into the pension system.
Davis says arguing state employees are owed an unsustainable retirement benefit because they are underpaid makes no sense. Instead, he said, “They ought to be paid a fair wage, commiserate with what the marketplace dictates.”
Whether lawmakers will back that up with higher pay for state workers is questionable. Lawmakers have not given state employees an across-the-board raise in four of the past 10 budget years, and the S.C. House’s budget proposal for the state’s fiscal year that starts July 1 again does not include a pay raise.
Already, public employees lag their private-sector counterparts in pay, a gap only likely to widen.
For example, the average annual salary for a registered nurse in South Carolina is $61,110, according to the Bureau of Labor Statistics. But the average salary for registered nurses who work for state Department of Mental Health is almost $8,000 a year less – $53,504, according to the agency.
‘Lay down a marker’
The Senate’s pension reform plan now will be sent back to the House, and lawmakers, eventually, will work out differences between the House and Senate versions of the bill.
But, Davis says, changing the pension bill to end the retirement system sends an important signal.
“The more important thing ... is to lay down a marker,” he said, adding the proposal signals there is a long-term structural problem with the defined benefit pension system.
Unless the state switches its pension system to a 401(k)-like system, taxpayers will have to continue to bail it out, he added.
State Rep. Bill Herbkersman, the Beaufort Republican who co-chairs the special legislative pension-reform panel with Sheheen, says lawmakers could close off the pension before Davis’ proposal would require them to.
A “defined contribution” 401(k) style plan has its advantages, Herbkersman said.
“It’s predictable,” he said, adding both employees and employers know how much they will contribute to a 401 (k) and that amount does not change as financial markets go up and down.
“There (are) also assurances that the money is going to be there because it’s set up individually,” he said.
Still, he noted moving away from the pension system would have “transition costs.”
For example, closing down the pension plan would cost more up front because younger employees no longer would be paying into the system, money that now goes to pay the benefits of retirees.
Pushback from worker advocates
S.C. State Employees Association director Carlton Washington says closing the pension system to new employees would have dire effects.
“With the uncompetitive wages being paid to South Carolina state employees,” those workers can not save enough for retirement under a 401(k)-style plan, Washington said.
State Rep. Gilda Cobb-Hunter, an Orangeburg Democrat who also sits on the pension-reform panel, said she was disappointed the Senate is proposing to close the pension system.
“Why are we muddying the waters with that conversation now?” Cobb-Hunter asked rhetorically, noting lawmakers are taking important steps by putting more money into the retirement system.
“I want to see how this latest phased reform will work before we obligate ourselves to closing out a system for future employees.”
Paying for retirement
State and local workers in the S.C. Retirement System system pay far more for their pensions than public-sector workers in other states.
S.C. public employees in the pension system
9%: The amount of their salaries that S.C. workers are poised to pay into the pension system, starting on July 1
8.66%: The amount S.C. workers currently pay into the pension system
6.5%: The amount state workers paid into the pension system five years ago
5.98%: The national median for an employees’ pension contribution
S.C. public-sector employers
18.6%: The amount of a worker’s salary that public-sector employers — including state agencies cities, counties and school systems — are poised to pay into the pension system in six years
13.6%: The amount public-sector employers are poised to pay on July 1; 1 percentage point of that increase would be paid out of the state’s general fund for non-state agency employers, cities, counties and schools
11.6%: The amount public-sector employers currently pay for an employee’s pension
11.5%: The national median for public-sector employers