Some lawmakers looking to shore up South Carolina's pension system for public workers say transitioning to a 401k-like plan is a possibility. But experts caution such a move won't erase existing debt.
Legislative leaders aren't advocating the idea — at least not yet. But several want to explore it.
"Every single solution is on the table and will be debated and considered," said Sen. Kevin Bryant, R-Anderson, co-chairman of a legislative panel studying possible solutions.
GOP Rep. Bill Herbkersman, the other co-chairman, said the panel will "definitely look" at a hybrid plan that maintains pensions for existing employees but puts new hires into a "defined contribution" system, such as 401k retirement accounts. Currently, public employees in South Carolina can choose that path over a pension, but few do so.
Republican state Treasurer Curtis Loftis says such a hybrid is inevitable, as he believes the existing system is beyond repair.
"Within the next five years, the state will have to close its pension plan to new entrants," he said after a State Fiscal Accountability Authority meeting. "The numbers are so large now, I don't think it can be turned around."
He's referring to a projected pension debt of $20 billion. The deficit has amassed since 1999 due to a combination of legislative decisions, investment underperformance and fewer workers supporting more retirees.
But that huge figure doesn't mean the system's collapse is imminent. It represents the state investment portfolio's current worth of $28 billion, compared with benefits likely owed to all 550,000 people in the system until they die, estimating — among other things — end-of-career salaries of current employees.
Putting new hires into a 401k system won't cut what's owed to those already in the system, said Jean-Pierre Aubry, an associate director at the Center for Retirement Research at Boston College.
It "does nothing for the unfunded liability," he said, noting the center takes no stance on what system is best. "Switching to defined contribution may solve a problem 40 years down the road, but it won't do anything in the near turn."
Several states have already transitioned new employees to a defined contribution system.
In Alaska, the switch "gave legislators a false sense they'd solved the problem," said Diane Oakley with the Washington-based National Institute on Retirement Security.
When Alaska mandated a 401k-like plan for all new hires, the state's pension debt was $5.7 billion. By 2013, it had jumped to $12.4 billion, as the state failed to make contribution payments and the number of employees contributing shrunk, the institute reported .
At least one state that switched has since switched back.
In 1991, West Virginia closed its pension system for teachers to new hires but reopened it in 2005, partly because teachers couldn't afford to retire with the paltry amounts in their 401k accounts, Oakley said.
Freezing benefits for current employees would significantly impact the debt, but their "legal protections are strong," Aubry said.
A 2011 Rhode Island law did so. Under a 2015 settlement , people working less than 20 years were moved to defined contribution plans, with frozen pensions.
South Carolina legislators say they recognize an attempt to cut current workers' benefits would result in a lawsuit they would likely lose, as they have in the past.
While private companies can yank their workers' benefits, and have for years, public employees' pensions are generally protected by state laws, Aubry said.
In 2006, South Carolina had to refund more than $30 million to thousands of retirees in the Teacher and Employee Retention Incentive program. The state's high court ruled the 2000 law creating TERI created a binding contract, which a 2005 law that required participants to contribute part of their salaries toward pensions breached.
Under TERI, retirees can work up to five years after they officially retire, while accumulating pension benefits. Their money is paid in a lump sum at the end of the program.
That 2000 law alone, which also allowed workers to retire after 28 years, accounts for nearly $2 billion of the debt, according to the state's benefits agency. TERI closes in 2018 as per the Legislature's 2012 pension reform law, which largely affected new hires.
