SC’s pension deficit is a huge issue — and lawmakers owe it to taxpayers to solve it

The state of South Carolina has never been particularly prudent about pension-related spending.

But this problem has become all the more evident over this past year as the pension deficit reached a whopping $26 billion — and that was before the COVID-19 pandemic hit and state budgets were thrown into disarray.

In a state where 12% of residents rely on these pension plans, this deficit is particularly concerning.

If South Carolina does not address the crisis soon, it may have to follow the lead of similarly underfunded states such as Kentucky, Rhode Island, and Colorado — three states that have been forced to increase taxes, cut current retiree benefits and shut down schools in order to balance their checkbooks.

Increased legal salaries

The most recent increase in pension spending was a result of S.C. Chief Justice Don Beatty asking the General Assembly to raise the yearly salaries of judges and solicitors.

Beatty, whose own yearly salary is $156,200, said that the increase in pay would help to attract and retain more qualified and experienced applicants.

But while other government employees like teachers and social service workers are often hard to retain, those workers have received no such increase.

South Carolina’s pension plan for judges and solicitors is unique because increased pay for working members directly correlates to more benefits for retirees, unlike the state’s five other pension plans.

So when the General Assembly readily complied with Beatty’s proposal, it resulted in a $100 million hole in pension plan funding.

To say the least, this was not the thriftiest choice.

Increased contributions to pension plans are frequent solutions to these kinds of deficits. But South Carolina’s contribution plans are already some of the highest in the nation, and the money coming in already covers a large part of the benefits.

A partial fix

One partial fix would be to have a more realistic investment returns assumption that better matches the actual returns performance in past years.

For the past five years, investment returns have averaged less than 6%, but the assumed rate of return has remained at 7.25%.

This far too optimistic prediction gives lawmakers the leeway to spend money they think they will have without setting real money aside.

But they can only pretend for so long.

Address external fees

Another issue that could be addressed is South Carolina’s high external investment management fees. According to data from Pew Research Center 2016, South Carolina had the second-highest fees compared to total investments of any state.

This can be partially attributed to a change in the state Constitution — approved by South Carolinians some two decades ago — that gave the state the power to start investing in more stocks with the hope of higher returns.

But that was back in 1999, a time when stock prices were on the rise and the state’s pension plans were 99% funded.

That decision was soon recognized to be ill-timed, but it was later followed by an even riskier decision to partner with hedge funds in 2007 right before the market crashed. Ever since then the state’s pension fund performance has continued to disappoint.

Can’t ignore it

Last August the Institute for Pension Fund Integrity ranked South Carolina last out of all 50 states in pension fund performance compared to a 40/60 investment portfolio — and second to last compared to 50/50 and 60/40 portfolios.

And South Carolina was also near the bottom in terms of funding ratios.

It is no longer 1999 and it’s past time for the state to reevaluate its strategy; indeed, the Institute for Pension Fund Integrity report recommended “the state … examine a simple indexing strategy for a large portion of the funds.”

Most importantly, however, South Carolina needs to focus on working smarter — not harder — and to stop spending money it does not have.

The issue of the pension deficit may be complicated, but it is not going to fix itself. If the Legislature continues to ignore the $26 billion deficiency, only the most extreme solutions will be left.

South Carolina’s lawmakers need to wake up to the pension crisis facing their state — before it’s too late.

Anna Katherine Daley is a summer policy associate with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education.

This story was originally published August 14, 2020 at 12:02 PM.