By Holley Ulbrich
Like many other states, South Carolina found itself in difficulty with its public pension system in the last two decades.
Years ago, the Social Security model of a defined- benefit pension program was widely adopted by states for their own public employees, but many of these state systems were underfunded. South Carolina’s underfunding resulted from a costly retirement incentive program and some serious errors in managing the funds.
The 2000 dot.com crash and the 2008 housing crash took more bites out of the fund. Low pay for state workers and the availability of a 401(k) option for some state workers reduced the ratio of workers paying into the fund of retirees collecting benefits. Underfunding slowed down growth of revenue from the system’s assets even as payouts to retirees were rising.
But like at least a few other states, South Carolina has assumed its responsibilities to current and retired state workers. States like South Carolina increased the employee contribution by a moderate amount and the state contribution by a much larger amount until the system’s assets are at least close actuarially to being properly funded.
In the last few years, the fund has actually seen revenue from pension fund contributions exceed payments to beneficiaries. Professional management, closely supervised by a commission with suitable professional qualifications, has made significant progress toward full funding. South Carolina does not give cost-of-living adjustments (COLA), but it does provide an annual 1% increase, subject to a $500 cap.
Why am I writing to our U.S. senators about this issue? Because there are close parallels between what is happening in the states and the urgent need to take action on federal Social Security. Like South Carolina’s public pension plan, Social Security is a defined-benefit plan that is not adequately funded. But unlike the S.C. General Assembly, Congress has been all talk and no action. The only cap in Social Security is on the amount of wages and salary subject to the Social Security tax.
We should consider removing the federal cap on income subject to the tax and impose a cap on benefits instead. The average billionaire doesn’t derive much income from something as plebeian as wages and salaries, but rather from profits, dividends, capital gains and other forms of compensation that are not subject to Social Security taxes. So, they have no reason to object. Football coaches, university presidents and others might have a challenge rearranging their income streams to evade some of the tax, but it would still generate considerably more revenue.
Why do we also need a benefit cap? Part of the challenge of increasing the income cap subject to Social Security tax is that it would result in higher future benefits to be paid to those high-end workers, based on their full earnings. A second cap would be needed on benefits to make this proposal work. Most higher income earners have access to additional retirement income from pensions, 401(K) plans and investments. So a benefit cap would not be a serious challenge to their lifestyle.
Social Security was never meant to be the sole source of retirement income, although it is for many Americans. Right now, the maximum possible benefit for a single individual is about $6,000 a month, or $72,000 a year, which should enable someone to survive without depending on the local food bank. A benefit cap of $6,000 a month with an annual COLA should not be too much hardship to bear.
Married? A spouse with limited earnings can claim half her husband’s benefit, raising the family income from Social Security alone to as much as $108,000. (In the South Carolina retirement system, unlike Social Security, retirees can assure survivor benefits for a spouse only by reducing their own monthly benefit to ensure those payments.) Retirees on the lower end of the income spectrum receive a larger percentage of their average wage than wealthier retirees.
Benefits are also more favorable to households with a single high-earner than those relying on two earners, each with a more moderate income. Certainly there are other challenges to be addressed, such as treatment of two-income families, but time is wasting and the Social Security Trust Fund is shrinking. Let’s do something NOW to increase the revenue and slow the growth of future benefits.
Holley Ulbrich is a professor emerita of economics at Clemson University. She holds a doctorate in economics from the University of Connecticut and a master of theological studies degree from Emory University. She is a member of the Unitarian Universalist Fellowship of Clemson, S.C., teaches adult religious education and does circuit preaching in small congregations.
