Want A Solvent Retirement System?

In 2009, the Policy Council released a report highlighting issues surrounding the risks of depressing future asset growth and health care costs for the South Carolina Retirement System (SCRS). In 2010, we followed up that report with ten recommendations for reform that wouldn’t require total overhaul of the system. Here’s a quick overview:

• SCRS’s financial position is questionable at best. The standard measure of assets to actuarial liabilities should target funding at 100 percent, rather than the arbitrarily selected 80 percent ratio. SCRS’s ratio, according to the Governmental Accounting Standards Board (GASB), went from 87.4 percent in 2001 to 65.5 percent as of July 2010. That puts future generations of South Carolinians at a deficit just over $13.3 million. Even scarier, a study released in October 2011, at the request of SCRS, puts the unfunded liability (as of July 2010) at over $17 million – and that doesn’t include the General Assembly, National Guard, or Judges and Solicitors Retirement systems.
• Cost-of-Living Adjustments (COLAs) are one of the main cost drivers of unfunded liability. In 2005, lawmakers set a 1 percent a year COLA increase and raised it to 2 percent in 2008. That alone created over $2.6 billion in new plan liabilities. If you work for a private sector company in South Carolina, or anywhere else, you’re lucky if your company even offers a defined benefit retirement plan, let alone one with a COLA.
• Actuarial assumptions should be viewed in the aggregate and do not define the true cost of the plan. Debating whether the correct annual investment return will be closer to 7.25 or 8 percent is an exercise in futility. In 2008, the state revised its annual assumption up from 7.25 to 8 percent. A realistic assumption would be about 4.5 to 6 percent, not the 7.5 percent that the Budget and Control Board recently lowered the rate to in November.
• The Teachers and Employees Retention Incentive (TERI) program is increasing pension liabilities, properly accounting for the time value of money. TERI exists for employees younger than retirement age, conceivably younger than 50, and allows beneficiaries to effectively retire while remaining in the workforce for five more years. Not only is this expansion an egregious financial drain on the system. It also forces the pension system to compete against the active workforce for the same employee: after all, many TERI employees don’t actually retire after five years; they simply get another job elsewhere in the economy.

Ten recommendations for change

1)      Use more realistic investment return assumptions.

2)      Implement a closed amortization period no longer than 15 years.

3)      Prefund retiree medical liabilities.

4)      Eliminate TERI.

5)      Employ independent actuarial analyses.

6)      Eliminate pension COLAs.

7)      Require more transparency on pension liability at the county/municipal level.

8)      Require timely reporting of total pension liability.

9)      Require better accounting and financial reporting methods.

10)   Switch from a defined-benefit pension plan to a defined-contribution pension plan for new employees.

There are bills, currently filed for the upcoming legislative session, that address parts of the recommendations listed above. We’ll keep an eye on the ones that make progress in the legislature.