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.
Updated: December 2017
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South Carolina
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Research rationale
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.[3] Without reform, funding is unlikely to keep up with promised benefits and these systems will become increasingly vulnerable to collapse.
Pension plans disadvantage teachers early in their careers. By overcommitting employer resources to retirement benefits, these plans often require districts to depress salaries and restrict incentives. The contribution of employers to their workers' retirement benefits is a valuable benefit, important to ensuring that individuals have sufficient retirement savings. Compensation resources, however, are not unlimited, and they must fund both current salaries and future retirement benefits. Mandated employer contributions to many states' teacher pension systems are extremely high, leaving districts with little flexibility to be more innovative with their compensation strategies.[4] Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up valuable compensation resources to ensure pension systems are more sustainable and equitable for all teachers. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.[5]
The burden placed on districts to fund unsustainable pension systems is further exacerbated for those in states where teachers also participate in Social Security, requiring the district to pay even more toward teacher retirement. While retirement savings in addition to Social Security are necessary, states are mandating contributions to two inflexible plans rather than permitting options for teachers or their employing districts.[6]
[1] Doherty, K. M., Jacobs, S., & Lueken, M. F. (2017, February). Lifting the pension fog: What teachers and taxpayers need to know about the teacher pension crisis. Retrieved from National Council on Teacher Quality website: https://www.nctq.org/dmsView/Lifting_the_Pension_Fog
[2] For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Costrell, R. M., & Podgursky, M. (2011, February). Reforming k-12 educator pensions: A labor market perspective. New York, NY: TIAA-CREF Institute. Retrieved from https://www.tiaainstitute.org/public/institute/research/briefs/institute_pb_reforming_K-12_educator_pensions.html
[3] NCTQ's analysis of the financial sustainability of state pension systems is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office. (2007). Government Accounting Standards Board statement No. 25. Retrieved from http://www.gasb.org/st/summary/gstsm25.html
[4] Costrell, R. M., & Podgursky, M. (2011, February). Reforming k-12 educator pensions: A labor market perspective. New York, NY: TIAA-CREF Institute. Retrieved from https://www.tiaainstitute.org/public/institute/research/briefs/institute_pb_reforming_K-12_educator_pensions.html
[5] For further evidence supporting NCTQ teacher pension standards, see The Segal Group, Inc. (2010). Public employees' retirement system of the state of Nevada: Analysis and comparison of defined benefit and defined contribution retirement plans. Retrieved from https://www.nvpers.org/public/executiveOfficer/2010-DB-DC%20Study%20By%20Segal.pdf
[6] For additional information on state pension systems, see Loeb, S. & Miller, L. (2006). State teacher policies: What are they, what are their effects, and what are their implications for school finance? Stanford University: Institute for Research on Education Policy and Practice. Retrieved from http://web.stanford.edu/~sloeb/papers/Loeb_Miller.pdf; and Hansen, J. (2008, May). Teacher pensions: A background paper. Committee for Economic Development. Retrieved from http://eric.ed.gov/?id=ED502293