MY TURN: Adjusting for inflation: A lesson for future policy

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By Holley Ulbrich, special to Statehouse Report  |  A few years ago during the effort to get the state retirement system moving back toward solvency, the General Assembly did something unusual, interesting and worth copying in other contexts.

Retirees had been getting a COLA (cost of living adjustment) based on the Consumer Price Index.  The General Assembly capped it at $500 a year, which meant that anyone whose state pension was more than $50,000 did not get a much bigger raise than the average pensioner.  The 1 percent limit has been fine during a period of low inflation, although it may need to be reconsidered if inflation heats up again.  But the cap is the interesting part.

Ulbrich

The Consumer Price Index tells us what has happened to the cost of the things we consumers buy every day—food, clothing, medicine, dog food, electricity, housing, cable TV.  All retired people experience about the same increase in many of those costs—a price jump in the cable rates or the price of a kilowatt hour or a box of cereal. So why should the higher-paid retirees deserve to get a bigger dollar increase than the people who cleaned their offices or mowed the lawn outside the building where they worked?

When they were working, perhaps the high-pension retirees were more skilled or experienced or productive, so they commanded higher salaries. Their base pension may (or may not) reflect their greater productivity during the years when they were working and also making larger contributions to the retirement system.  But now none of them, high pension or low pension, are contributing to the retirement system. Or being productive on behalf of the state of South Carolina.  A

ll retirees who are 65 or older have Medicare and the state retiree health plan with the same dollar increase in premiums. (Medicare premiums may rise more above a certain income level, but that’s addressed in the Social Security system where COLA adjustments are not subject to a cap.) Giving everyone the same percentage increase means that the income gap between rich and poor retirees gets bigger. A capped increase does less to increase the gap, while a flat dollar increase ($300 for everyone!) leaves the income gap unchanged. The General Assembly did not mandate an inflation adjustment by promising an equal number of dollars, but the cap was an interesting step in that direction.

Perhaps the state, and other employers, should reconsider other kinds of across-the-board percentage increases. It makes a difference how we think about the gap between Jones’s annual salary of $100,000 and Smith’s $25,000. Do we give them a percentage increase of 3 percent each, which is $3,000 for Jones and $750 for Smith?  Do we give them an equal increase of $1,000? Do we give them a 3 percent increase subject to a cap at $50,000, which means $1,500 for Jones and $750 for Smith?  If it’s a cost-of-living raise rather than a productivity or merit raise, did Jones’s cost of living really rise four times as much as Smith’s, who pays the same amount for a kilowatt hour of electricity or a gallon of gas?

So two cheers for South Carolina, whose cost-saving measure on pension payments was implemented in a way that could be a good example for other kinds of inflation adjustments and also for other states to follow.

Holley Hewitt Ulbrich is an Alumni Distinguished Professor Emerita of Economics at Clemson University and a member of the Board of Directors of the League of Women Voters of South Carolina.

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