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Charleston Business

Social Security Is Economic Security for Many, But Changes to Program Are Needed

Sep 20, 2022 04:27PM ● By David Dykes

Some U.S. senators and others have recently said Social Security needs saving again.

Rudy Boschwitz, a Republican who served as a U.S. senator from Minnesota from 1978-’91 wrote in The Wall Street Journal in June that Social Security is a perennial crisis. He offered several reform proposals:    

Raise the full retirement and early eligibility ages, and change the way benefits are calculated for new recipients. 

Slow the growth of benefits for new and existing beneficiaries alike by changing the basis on which they’re indexed for inflation. 

Withhold some Social Security COLAs from higher-income retirees, and give the COLA not annually but every 14 or 15 months using the 12 months of lowest inflation. 

Tax Social Security income for higher-bracket taxpayers and give them the option to forgo all or part of their monthly payment. 

Raise the payroll tax by 0.1 percent of wages every other year – half from withholding, half for the employer’s contribution – for 20 years, a total tax increase of 1 percent.   

According to Joel Eskovitz, director of Social Security and Savings at AARP’s Public Policy Institute, and Jim Palmieri, a senior strategic policy adviser with the Institute’s financial security team, new fact sheets for all 50 states and the District of Columbia document the importance of Social Security, highlighting its value as a source of retirement income and fighting poverty. They also detail the extent to which each state’s residents receive and rely on Social Security benefits as well as the dollar amounts those payments contribute to local economies as recipients buy goods and services.

They note that particularly during this period of high inflation and economic uncertainty, Social Security has a key role in supporting disabled and retired workers, their spouses and survivors, and it continues to play a major role in reducing poverty among people ages 65 and older. The fact sheets provide detailed numbers about how many residents in each state receive Social Security, broken down by the different categories of beneficiaries, and average monthly benefits.

Eskovitz and Palmieri report that more than one in five South Carolina residents —  1,197,138 people — receive Social Security benefits. Those payments inject more than $20.4 billion into the state’s economy every year.

They also report:

The largest group of beneficiaries in South Carolina are its 857,657 retired workers, who account for 71.6 percent of all Social Security beneficiaries in the state.

South Carolina has 166,551 residents who receive Social Security disability income, representing 13.9 percent of the state’s Social Security beneficiaries.

In South Carolina, 96,364 spouses, former spouses, widows, widowers, and parents of deceased beneficiaries account for 8 percent of the state’s Social Security beneficiaries. An additional 76,566 children, representing 6.4 percent of the state’s Social Security beneficiaries, receive benefits.

In terms of an economic engine for the state, the Institute reports $15.2 billion is paid annually to those receiving retirement benefits and their eligible family members, $2.2 billion via survivors benefits, and an additional $3 billion paid through the disability program.

Recipients buy goods and services with their Social Security benefits, increasing business sales — which helps not only the companies making those sales but also the firms that supply them. The result is more jobs and income to businesses and workers in South Carolina.

Additionally, the Institute says Social Security lifted 293,000 South Carolinians 65 or older out of poverty from 2018 through 2020. In fact, 39 percent of the state’s residents in this age group would be in poverty but for Social Security benefits; that number falls to 8.7 percent when Social Security income is included. Nationally, the program lifted 16.1 million people 65 and older out of poverty, reducing the proportion below the poverty line from 37.8 percent to 9 percent.

In South Carolina, the average Social Security retired worker benefit is $1,562 per month (about $18,700 annually). The national average monthly retirement benefit is $1,544.

Also, the average Social Security disabled worker benefit is $1,303 per month (about $15,600 annually). The national average monthly disabled worker benefit is $1,277.

And 441,213 South Carolina residents, or 47 percent of individuals 65 and older, live in families that rely on the program for at least half of their income. The Institute also reports 199,558 South Carolina residents, or 21 percent of individuals 65 and older, live in families that rely on the program for at least 90 percent of their income.

According to McKinsey & Company, a global management consulting firm, while accumulation has long been a focus for pre-retirees, ensuring a consistent and sufficient stream of income through retirement is now a pressing need for many.

And McKinsey says: With core innovations in defined contribution plans and help from a long bull market after the global financial crisis, U.S. retirement account balances across defined contribution accounts and IRAs more than doubled over the past decade to $23 trillion.

It adds that now, however, pre-retirees (those aged 50 to 64) must face another critical retirement issue: decumulation, or the process of converting savings for retirement into a consistent and sufficient stream of income that lasts through retirement.

Exacerbating the challenge, McKinsey says, are several macro factors, among them rising inflation, market volatility, uncertainty about the costs of health care and assisted living in retirement, and a meaningful wave of early baby boomer retirements. 

“As many as 80 percent of baby boomers may be unprepared for retirement, according to our recent nationwide surveys of almost 9,000 U.S. households,” McKinsey says. “Moreover, many prospective retirees feel that they lack assets and the financial know-how they need for a confident retirement.”

It adds that many pre-retirees are running out of time to accumulate sufficient retirement assets. Just over 80 percent of baby boomers may be unprepared for retirement, according to their surveys in 2021 and 2022. 

Says McKinsey: “Approximately 47 percent of households nearing retirement report that they have not achieved financial sufficiency, including 20 percent who are in the safety net, reliant heavily on Social Security for retirement income, and 27 percent who are financially at risk of not maintaining their working years’ standard of living. Another one-third of households are financially near the line, in that their assets leave little to no margin for shocks like market downturns, continued inflation, or family health changes. That leaves only 19 percent of pre-retirees likely to be fully financially secure.”

Last year, U.S. Senate Special Committee on Aging Ranking Member Tim Scott (R-S.C.) released a report titled “The American Dream in  Our Golden Years: Improving Retirement Security and Building Independence,” which examined trends and gaps in the retirement savings system. Scott also introduced the Senior Citizens’ Freedom to Work Act, along with Sen. Marco Rubio (R-Fla.), to repeal the Social Security Retirement Earnings Test (RET), a key recommendation in the report.

“The American Dream shouldn’t stop at a certain age,” Scott said. “By implementing this report’s key recommendations — like the Senior Citizens’ Freedom to Work Act — we can empower older Americans to continue doing what they love in their Golden Years with peace of mind, knowing their retirement is secure.”

Scott’s report revealed that, while the American retirement system does not need an overhaul, some threats to the system and gaps in coverage remain. The report praises the bipartisan Setting Every Community Up for Retirement Enhancement (SECURE) Act and outlines several additional reforms to strengthen retirement security, including:

Expanding lifetime income options for retirees;

Codifying auto-portability regulations to prevent leakage;

Plan benefit expense flexibility to increase retirement options;

Expanding and strengthening health savings accounts;

Protecting the gig economy;

Supporting golden entrepreneurs; and

Eliminating the RET in Social Security.

So there’s a lot on the table, with sensible ideas. Social Security isn’t a panacea for all retirement ills. But it’s a safety feature for so many.

Let’s pay attention.

David Dykes is editor of Greenville Business Magazine, Columbia Business Monthly, and Charleston Business Magazine.