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While it doesn’t often make headlines, funding the state retirement system is among the most important challenges facing state government.
State employees have 6.5 percent deducted from their paychecks to go toward their retirement benefits, and their employers contribute an even higher 9.68 percent toward those benefits. Employees expect the pension system to remain healthy so benefits will be there when they retire.
Yet the retirement system has what’s known as an “unfunded liability,” or a deficit. These are the terms used to describe the gap between the money a pension system projects it will receive from all funding sources and the money it will need to pay the cost of promised pension benefits.
This unfunded liability has grown to about $14 billion, and it’s getting worse.
How did it get in this condition? Well, for starters, there were poor decisions that have driven up costs.
For example, 10 years ago the Legislature cut the time that employees needed to work to qualify for full retirement benefits from 30 to 28 years. This drove up pension costs and cut off two years of contributions into the system.
At the same time, they created the Teacher and Employee Retention Incentive (TERI) program, allowing people to retire and return to work while their pension benefits accumulate in an escrow account, to be distributed as a lump sum at the end of their TERI employment.
TERI was adopted without a realistic understanding of its cost. It prompted large numbers of employees to flood the retirement rolls, which strained the pension fund and – probably more than any other factor – contributed to the funding crisis we now face.
There are numerous other reasons the unfunded liability keeps growing, but space doesn’t permit discussing them here.
If we’re to truly honor our commitment to current retirees and employees – and also serve the interests of the taxpayers – we must reform the pension system.
State law places the pension system under the state Budget and Control Board – the five-member panel comprised of the governor, treasurer, comptroller and chairmen of the Senate Finance and House Ways and Means committees. At a recent board meeting, I proposed what I consider a first step for reforming the system: Require employees to more equally shoulder the rising costs of their own retirement benefits.
You see, over the past couple of decades, whenever the costs of paying out benefits have increased, those added costs have been passed on to the taxpayers. In fact, the past four times annual contributions needed to be increased, taxpayers were handed the whole tab – without requiring any shared contribution from employees, who are the ones receiving the benefits.
My proposal was simple: Increase annual contributions to the system by letting employees pay a larger share of their costs. I also proposed that the General Assembly reform the system to stop the dangerous growth of the unfunded liability and start paying it off.
Only Gov. Nikki Haley, the board’s chair, supported my motion. Unfortunately, she was told that meeting rules prohibited the chair from seconding a motion, so it died because no one else would second it.
In the coming months, this issue is likely to receive much more attention. For my part, I’ll be working to shine a light on the problem and on the need for reforms.
To increase pension contributions solely on the backs of taxpayers, without asking employees to pay a fair share of any contribution increases and without making necessary reforms, would be to just kick the proverbial can down the road – while making the problem worse.