COLUMBIA, S.C. (AP) - Legislation that aims to stabilize South Carolina’s pension system for public employees is “just the first step of many” needed to fix the problem, Gov. Henry McMaster said Tuesday as he signed it into law.
The law will require higher payments from workers and employers, starting in July.
While the Republican governor applauded legislators for addressing a “pension liability crisis,” he said he’s disappointed the law doesn’t set a date for moving new hires to a defined contribution plan, such as 401K retirement accounts.
That would not affect employees and retirees in the state’s current system, which provides retirees set pension payments for life, depending on factors including how long they worked and their salary in the final years. A 2012 pension reform law changed when people could retire with full benefits and changed payment calculations for people hired after that law.
“Defined benefit pension plans are now virtually extinct in corporate America,” McMaster wrote in a letter to House Speaker Jay Lucas. “They are unsustainable, expensive and require constant infusions of capital to stay afloat.”
Legislators have already made clear more changes are coming. A House-Senate study panel is set to start meeting next month on the next round.
South Carolina has amassed a projected pension debt of more than $20 billion since 1999 because of a combination of legislative decisions that enhanced benefits, underfunding, investment underperformance and fewer workers supporting more retirees.
That liability represents the state investment portfolio’s current worth compared with benefits likely owed to all 558,000 people in the system, including workers and retirees.
The law’s financial boost halted the “free fall,” so the state could meet its obligations to current employees and retirees, said Sen. Sean Bennett, R-Summerville.
“But we’re not done,” said Bennett, a member of the panel that crafted the bill. “We must now work to establish a modern retirement plan that is both viable and desirable to the next generation of public servants.”
In his letter, McMaster urged legislators to consider limiting the 401K-like system to new state employees.
A co-chairman of the study panel, Rep. Bill Herbkersman of Bluffton, has said it will explore possibilities that include transferring new hires to a 401K and closing the system to employers that aren’t state agencies and school districts.
Less than 40 percent of employees in the system work for the state. The hundreds of other employers include city and county governments, public utilities, colleges, hospitals, and even associations that advocate for public employees.
Under the law, both employers and their workers will pay more starting July 1.
But that will end rate hikes for workers, who already pay some of the nation’s highest rates, while their employers will face increases through 2022.
A 7-percentage-point hike in employers’ contribution rates over the next six years means taxpayer-supported entities will cumulatively put an additional $3 billion into the system. Once the hikes are fully phased in in 2022, employers will contribute $827 million more into the system annually than they currently do.
More than $42 million extra will collectively come out of the paychecks of about 223,000 employees next fiscal year.
Beginning July 1, workers in the state’s main retirement plan will contribute 9 percent of their salaries, up from 8.66 percent currently. Officers and firefighters in the smaller law enforcement plan will contribute 9.75 percent, up from 9.24 percent. The law says that sixth consecutive increase will be their last.
Legislators’ budget plan for the fiscal year starting July 1 includes roughly $150 million for the first year of the pension law. The House and Senate are still finalizing their plan.
Both chambers’ versions fully cover the law’s required 2017-18 rate hike for state agencies that are funded primarily by state taxes. The budget could cover up to half the increase for other employers in the system, including colleges and local governments.
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