The Greenville News reported that Gov. Henry McMaster wants to abolish the state’s defined-benefit pension system and replace it with a 401(k)-style plan, making state employees responsible for their own retirement income planning. Generations of future South Carolinians who understand what’s at stake are turning cartwheels. I urge you to support this initiative and let your legislators know your feelings.
Why? Because South Carolina, like most public entities, has created a monster that must be slain. Private sector companies realized this decades ago and have for the past 20 years been dismantling their defined benefit pension plans. This wasn’t a mean-spirited move to deprive future retirees of an income, but rather ensuring the survival of the enterprise – pure and simple.
Let’s look at some facts. South Carolina’s overall pension system, which includes state civilian employees, police, legislators, judges and national guardsmen, is underfunded by over $20 billion (yes, with a “b”). That’s over $4,000 that every man, woman and child in South Carolina owes to present and future state retirees. The current (inadequate) funding that is going into this system is 20% of eligible workers’ salaries, split between themselves and the state. These numbers take my breath away.
The reasons this and most public entities’ pension systems are under water are the same reasons the private sector has been scrambling to exit their defined benefit plans. First, that people are living longer. These plans were built in the 1940s when life expectancy was 63 years. Some workers were expected to die before retirement and those who didn’t were expected to receive benefits for only 5-10 years. Imagine how pensioners living to be 80 and 90 explodes the amount of money needed to keep our promises to them.
Secondly, legislators looking for votes sweetened up the benefits along the way, including cost-of-living adjustments that further ballooned the liability. They wrote checks we can’t cash. Finally, these plans were based on investment returns much higher than recently achieved on lower-risk investments such as bonds. Ask any fixed income investor how that’s been working out lately. Those three forces alone, together with some past mismanagement of the SC pension system have put it in functional bankruptcy. If the $20 billion liability were fully represented on the state’s balance sheet we would be an additional $13 Billion in debt, beyond the $14 Billion we’ve owned up to.
The News article stated that “advocates for state workers warned that ending one of the few perks for underpaid workers would lead to an exodus of employees at already understaffed state agencies.” Now, that’s some interesting logic. We can’t afford to pay competitive wages now, but we can afford to pay those same people for a couple of decades after they retire? Albert Einstein once said, “We cannot solve our problems with the same thinking we used when we created them.” Who knew he was talking about our state pension system?
Gov. McMaster has proposed a thoughtful, rational, “soft landing”approach to winding down this monster while being fair to past and future state employees. Please let your legislators know you’re behind putting this financial time bomb to sleep.
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