If you’re a devoted reader of Defined Benefit, then you know there is one way to ensure a pension plan is well-funded: employees and employers alike must make contributions to the plan annually – and in full. State employees like firefighters, sanitation workers and nurses never miss a payment. As for state governments, most pay their share and the ones who do not face the most severe funding challenges. These incoming contributions – ’incoming’ being the operative word – coupled with investment returns, enable systems to provide retirees with secure benefits.
When news broke last week that South Carolina lawmakers unanimously voted to increase contributions to state pension plans – a system that supports 1 out of every 9 South Carolinians – it appeared the legislature had taken a step towards improving the health of the pension system. However, there was a twist – a last-minute amendment added a stipulation that the plans be closed to new employees once full funding has been achieved.
With increased contributions, the plans are estimated to reach full funding in the 2040s, at which point new hires would presumably be placed in a defined contribution 401(k) plan. For a state with an average 401(k) account balance of only $20,630 – a mere fraction of what’s needed to retire with dignity – this move would jeopardize the retirement security of state workers. Not to mention closing a pension plan is a surefire way to cause funding levels to plummet.
South Carolina legislators need look no further than the states and cities that have closed their pension systems to learn of the costly ramifications that follow. We recently highlighted three states who suffered the consequences of abandoning their pension systems – including one who moved back. In 2005, West Virginia reopened its pension system for teachers after closing the plan in an attempt to improve funding levels in the early nineties. In less than a decade after the plan’s reopening, funding levels more than doubled and teachers now enjoy access to a secure, dignified retirement.
After the Great Recession decimated 401(k) accounts across the country, state employees in Connecticut banded together and campaigned for the right to join the closed state pension system. They were successful, and in 2012, transfers out of the faltering 401(k) plan and into the pension began. Estimates place the total cost savings for the State of Connecticut as a result of these transfers at $10 million per year.
State employees weren’t the only in Connecticut to recognize the value of a pension: firefighters in the city of New London moved back to a pension in 2014 after the previous defined contribution plan failed to provide adequate financial security for retirees.
Aside from providing employees with the most secure retirement, pensions also serve as a valuable tool to recruit and retain talented workers. In 2012, the city of Palm Beach, Florida moved from a traditional pension to a hybrid defined benefit-defined contribution plan. The city lost 24 public safety officers to neighboring jurisdictions and another 28 left the following year. Without competitive retirement benefits to offer, Palm Beach’s police and fire departments were inexperienced and understaffed. In 2016, the city council voted to return to a traditional defined benefit pension.
As the saying goes, ‘those who do not learn history are doomed to repeat it.’ South Carolina legislators should heed the warnings of the states and cities before them and scrap this ill-conceived amendment. They may not be around in 20 or 30 years to feel the first-hand consequences of their decision, but the workers – and taxpayers – of South Carolina certainly will.
