Facts don't seem to count for much here -- it's the ideological principle of the thing that seems to be driving this.
Some say our retirement system has an unmanageable unfunded liability. We, like many systems across the nation, do have a significant unfunded liability. Some modest adjustments in contributions and benefits may be necessary to deal with that unfunded liability. But our system is actuarially sound and there is no crisis. We have time to deal with any changes that need to be made and they should be made in a deliberate manner with professional assistance. The system is not broken so we need to be careful when we try to "fix" it. Unfortunately there does NOT seem to be the inclination to want to solve the problem in this manner.
In Davis's words, however, the state is "struggling" with its retirement program.
The crux of the matter seems to be this issue of "unfunded liability." As I understand it, analysts or actuarials calculate that IF every single state employee currently on the job retired today, all at once, the state would be "liable" for the dollar amount necessary to pay out all of their collective retirement benefits on the spot.
Of course, that doesn't happen. Not even employees who are eligible to retire do so on the very date of their eligibility, much less those who have been in state employment only a few years. So the premise is absurd. But let's play it out that way. Let's assume that every single state employee working today retired today. What would happen?
If that occurred, then the "unfunded liability" that lawmakers moan about would impact us. The retirement system is apparently very well situated to meet present needs, even the needs that will arise for many years to come, but it every state employee retired today, it likely wouldn't be able to meet its benefit obligations, and that is apparently what the "unfunded liability" means. Because the state legislature has made promises -- meager, pale, stingy ones, but promises nonetheless -- to its public workforce, the state legislature would have to make up the difference quickly. And that would probably require cutting the budget or raising taxes.
It's that last part -- raising taxes -- that provides the legislature's most conservative members their hook. Using this absurd premise, they wave the "raising taxes" flag to call out their troops, and the troops come a-running. We have to avoid raising taxes to meet this outrageous demand by -- cue the scary music -- retiring state employees, so we have to act now, and cut-cut-CUT! their benefits while we have time.
One way to push state employees out into the cold and get them off the state's retirement rolls is to make them enroll in a 401-K account. And that's where Bill Davis of the Statehouse Report picks up the trail, writing,
Will they or won’t they? That is the question.
Will future state employees continue to get state pensions or will legislators, as bills in the legislature propose, keep new employees from joining the state pension plan and force them into 401K-like savings plans?
State Sen. Chip Campsen (R-Charleston), the primary author of the Senate version of the retirement plan bill, said state government needed to follow the private sector’s lead in handling its pension obligations. How? By segueing from defined benefits plans, or pensions, to defined contributions plans that are controlled by employees and seeded with government contributions.
What's the difference?
The difference in a defined benefit and a defined contribution is the difference between paying off the mortgage and living securely through your retirement, OR losing the house before paying it off, and having to work another 10 or 20 years past your retirement age because your retirement check doesn't cover the groceries.
A defined benefit means that the state guarantees what it promised: You work all those years, and we guarantee that you'll collect the retirement benefit you were promised from day one.
A defined contribution means that the state will kick in a little bit to your 401-K, but when the market tanks again and your 401-K loses forty percent of its value, you're on your own: The state owes you nothing.
Lest we forget, every time there's an economic recession and the market drops, the value in our 401-K account drops too. It happened during the stagflation recession of the 1970s, the Reagan recession of the early 1980s, the Bush I recession of 1991, and Bush II recession of the early 2000s, and when the real estate bubble burst two years ago: Market values dropped, and everyone with 401-K accounts saw a sudden drop in their account values. Translation: If your retirement security is tied up in the stock market, you don't have any retirement security.
But state employees and retirees whose retirement security rests in the South Carolina Retirement System saw no damage whatsoever. What has been promised to them will be delivered to them, because we as a state have guaranteed that to one another. It is the contract we make with our state employees in recognition of the piteous salaries we pay them over the course of a working life.
And this situation provides us perhaps the best illustration of our lawmakers' callousness toward the very workers who clean our buildings and highway roadsides, who provide public services and do them at odd hours of the day and night. When snow falls in the Upstate and shuts down our roads, who gets up at 3 a.m. to clear them? That's who we're talking about.
Gov. Nikki Haley says something has to be done, claiming the state’s retirement system is burdened with $13 billion in unfunded liabilities. Critics say the number is vastly overstated. But what Haley wants done is unclear as she has yet to spell out specifics in her administration’s plan.
Reached for comment Friday morning, Haley’s spokesman Rob Godfrey said the governor has said state government needed “to protect the benefits promised to current retirees. She has also said that the current unfunded liability is not sustainable, and is probably the greatest financial risk facing South Carolina.”
Treasurer Curtis Loftis, who has clashed with Haley publicly over Blume’s appointment, told Statehouse Report this week that the state employee retirement pension fund was $88 million underfunded just from 2010 alone.
This is a great piece of information: Which is it, $13 billion, or $88 million? Not that $88 million is beans, but it's a far cry from $13 billion -- and that's if we should buy this line of criticism in the first place. Is the sky falling? Or are our conservative Cassandras in the big house just chafing at having to pay state workers and then pay them a retirement benefit, too?
Currently, the state retirement system has roughly 450,000 members, with about 190,000 active members and 110,000 pensioners members and 150,000 members not yet eligible to receive benefits, according to the Budget and Control Board, which oversees the retirement system.
Loftis said he worried the state may be on the hook in the future if new hires were cut out of the defined benefits system. The treasurer worried that if the state didn’t continue to add new hires to the pension system, then the state eventually might have to contribute more money over time to fund any gaps in the pension system.
Why should we want new hires to be added to the pension system? It's because new hires contribute to the system, and their contributions are invested with everyone else's in the stock market. The greater our aggregated stock market investment, the greater our return, and the better able we are to pay current and future retirement benefits without adding dollars directly to the system.
Take those new hires out of the equation, and you lose the benefit of their investment. It's a Catch-22 for fiscal conservatives.
In contrast, there seems to be no conflict at all for fiscal progressives, whose argument is simple: If you want public services, pay public employees and guarantee them a retirement benefit.
The key is the guaranteed benefit. This is how Franklin Roosevelt explained Social Security to us, and how it worked before federal lawmakers turned it into their own federal savings account.
Campsen worried that the current retirement model mimicked the federal Social Security program where new contributions were being used to fund existing benefits. “If that’s what happening in the state system, then we need to stop the bleeding sooner rather than later,” he said.
But that’s not what is happening. The state retirement system is fully solvent because the state is not borrowing from the pension fund to pay other bills, as is the case with Social Security on the federal level.
Bob Borden, who oversees the retirement pension fund, has said publicly that the fund is “back in the black” and exceeding investment projections, with a total value of about $23 billion.
Borden did not return several days of calls for comment on the fund, so it is not clear what he means by saying the fund was “back in the black.” In 2008, the fund’s value was $29 billion -- $6 billion higher than it is today. The $23 billion fund now, however, has regained $3.5 billion from a $19.5 billion low point two years ago.
See that "low point" from two years ago? That's when the bottom fell out of the market thanks to the real estate and mortgage mess. In two years, the retirement system was able to bounce back. But how did the sudden drop in value affect Americans with 401-K accounts who were ready to retire when the bottom fell out? They couldn't retire, that's what happened. I can't imagine many things worse than being ready to retire after a long career, and finding that the 401-K account that was supposed to support you through the next 20 or 30 years is now so devalued that it can't support you for five years. What options do you have then, when bills are due and the best your financial advisor can do is tell you to leave the account alone and wait, wait, wait, wait until the market comes back.
That's the difference between having a defined benefit and a defined contribution.
Joe Benton, the interim executive director for the S.C. State Employees Association, disagreed with Haley’s assessment of the pension fund. He said she was playing games with the numbers – that her $13 billon number was premised on the unrealistic idea that everyone would who could retire in state government were to do so tomorrow.
Benton likened the crusade against the state’s retirement system as saber rattling, considering, he said, that the average pension recipient receives less than $20,000 a year. And Benton, a former economics teacher, worried that it might not be the safest idea to let state employees with little investment savvy manage their retirement savings.
Oh, I think that's precisely what the investment firms hope for: Wave after wave of state employees with little investment savvy bringing their retirement savings to invest in the market. This is how newly-minted young investment bankers become wealthy, powerful investment bankers -- and how South Carolina's poor get poorer and poorer, all the while.