Pension Sustainability: South Carolina
Pensions Policy
Analysis of South Carolina's policies
As of June 30, 2015, the most recent date for which an actuarial valuation is available, South Carolina's defined benefit pension system for teachers is 62.0 percent funded, a decrease of 2.7 percentage points since NCTQ's last report. Its current pension debt exceeds $22,400 per pupil throughout the state. It also has a 30-year amortization period. This is due to an accounting method, however, in which South Carolina uses an open 30-year amortization period, meaning that the amortization period is reset to 30 years every year. Thus, the unfunded liability is never fully amortized. Under a closed amortization method, if the plan earns its assumed rate of return and makes its full actuarially determined contribution payments, it would take the state over 30 years to pay off its unfunded liabilities. Neither the state's funding ratio nor its amortization period meets conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.
In addition, South Carolina commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 11.09 percent is too high, in light of the fact that districts must also contribute 6.2 percent to Social Security. This rate is set by the South Carolina Budget and Control Board. While this rate allows the state to pay off liabilities within a 30-year period, it does so at a high cost, precluding South Carolina from spending those funds on other, more immediate means to retain talented teachers. The mandatory employee contribution rate to the defined benefit plan of 8.19 percent is also excessive in light of the fact that employees also contribute to Social Security. This rate is set by the state legislature.
The employer contribution to the defined contribution system is a reasonable 5 percent. Employers still must make a 11.09 percent contribution for all of their employees, but for defined contribution participants only 5 percent is allocated to employees' accounts and most of the remainder is used for paying down the unfunded liabilities of the defined benefit system.
Recommendations for South Carolina
Ensure that the pension system is financially sustainable.
The state would be better off if its entire system was over 95 percent funded to allow more protection during financial downturns. The state should also use a 30-year "closed" horizon for amortizing its debt rather than its current 30-year "open" amortization method so that the burden of paying today's promises is not put off onto future generations. South Carolina, however, should consider ways to improve its funding level without raising the contributions of school districts and teachers. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention and crowd out funding for other areas in education.. Improving funding levels necessitates, in part, systemic changes in the state's pension system. The goals on pension flexibility and pension neutrality provide suggestions for pension system structures that are both sustainable and fair.
State response to our analysis
South Carolina indicated that the percentage of the UAAL attributed to teacher membership in the larger system estimated by this analysis was too large. The state asserted that the UAAL for school districts should be $8.1 billion instead of $10.2 billion. However, the state did not provide any supporting documentation.
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South Carolina
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Delivering Well Prepared Teachers
- Admission into Teacher Preparation
- Elementary Teacher Preparation
- Elementary Teacher Preparation in Reading Instruction
- Elementary Teacher Preparation in Mathematics
- Early Childhood
- Middle School Teacher Preparation
- Secondary Teacher Preparation
- Secondary Teacher Preparation in Science and Social Studies
- Special Education Teacher Preparation
- Special Education Preparation in Reading
- Assessing Professional Knowledge
- Student Teaching
- Teacher Preparation Program Accountability
Expanding the Pool of Teachers
Identifying Effective Teachers
- State Data Systems
- Evaluation of Effectiveness
- Frequency of Evaluations
- Tenure
- Licensure Advancement
- Equitable Distribution
Retaining Effective Teachers
Exiting Ineffective Teachers
Pensions
Research rationale
Teacher salaries are just one part of the compensation package that teachers receive. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, nearly all states continue to provide teachers with a defined-benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers.
Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.
Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.
Pension Sustainability: Supporting Research
NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.