Last year we bailed out the SC pension system. When do we reform it?

Almost all of the talk at the State House so far this year has been about SCANA, Santee Cooper and how the Legislature should react to the nuclear-plan fiasco in Fairfield County — and rightly so. But we also must address an existential threat to state and local government budgets: the fiscally unsustainable public-employee pension system.

In April, the Legislature passed and Gov. Henry McMaster signed a bill that bailed out that system by increasing taxpayers’ annual contributions by 60 percent. Previously, taxpayers were contributing $1.36 billion each year; as a result of the new law, and once the increase has been phased in over seven years, their annual contribution will be $2.18 billion. That’s an extra $820 million out of taxpayers’ pockets, every year.

Why a seven-year phase-in? Because politicians hope that, if money is taken out of peoples’ pockets in increments instead of all at once, they’ll be less likely to notice it. Politicians are big believers in the parable of the boiling frog.

Here’s some perspective on just how hot the water will get: As a result of the bailout, taxpayers will pay more than double into the pension what public employees do. This two-to-one ratio is way out of whack; the Heartland Institute argues in its survey of states’ pension systems that “a fair rule of thumb would be that government workers should contribute at least as much toward their retirement as taxpayers.”

In any event, that was last year’s “reform” to the system: take more money from taxpayers and put it into pensions. Nothing was done to avoid additional bailouts in the future. And the only way to avoid future bailouts is to require future public-employee hires to participate in defined-contribution plans, like 401(k)s, instead of fiscally unsustainable defined-benefits plans, which provide monthly payments for life in retirement based on length of employment and salary. (I emphasize future since current employees’ or retirees’ defined-benefit plans must not be changed; promises previously made must be kept.)

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Defined-benefit plans used to be the norm with public-sector pensions. But in recent years, recognizing that they are fiscally unsustainable, 15 states have shifted to defined-contribution plans, where a certain amount of money is set aside each year for each employee’s benefit. In other words, the contribution is defined, but the benefit is not.

The private sector, of course, made this move long ago, because traditional plans are expensive, unpredictable and unsustainable, putting virtually no risk on the workers or retirees. In the case of public-sector pension systems, taxpayers must make up any funding shortfalls.

As I argued on the floor of the Senate in April, lawmakers should have insisted on a move from defined-benefit plans to defined-contribution for future public-employee hires at the same time they forced taxpayers to bail out the pension system. Very powerful political stakeholders — all of the public employees in South Carolina — needed something from the taxpayers. That was the time to demand the necessary and politically difficult plan reforms.

Instead, lawmakers committed taxpayers’ money without also insisting on what they know is necessary to avoid future bailouts, and the completion of the pension-reform effort is now being hindered by concentrated benefits and dispersed costs, a phenomenon that favors recipients of government payments at the expense of the average taxpayer. Lobbyists for the various groups of public employees are swarming the State House to demand the continuation of defined-benefit plans for public employees who are hired in the future; the interests of these groups are being heard loud and clear.

But the taxpayers are not. This is not surprising; as F.A. Hayek observed in Road to Serfdom, while “innumerable interests could show that particular measures would confer immediate and obvious benefits on some, the harm they caused on others was much more indirect and difficult to see.”

Irrespective of how difficult, lawmakers have an obligation to recognize that massive bailouts do in fact harm people, even if that isn’t readily apparent. The taxpayers of South Carolina already will be soaked for an extra $820 million each year. A failure by lawmakers to take an obvious step that would avoid future bailouts would be an inexcusable breach of the public’s trust.

This story was originally published January 19, 2018 at 10:14 AM with the headline "Last year we bailed out the SC pension system. When do we reform it?."