This article originally appeared in Dollars
and Sense magazine.
Proponents of Social Security privatization are trying to claim that
the current program is unfair to African Americans and that a privatized
program would serve African Americans better. This argument lends support
to the privatization agenda while at the same time giving its advocates
a compassionate gloss. But the claims about African Americans and Social
Security are wrong.
The Old Age Survivors and Disability Insurance Program (OASDI), popularly
known as Social Security, was put in place by Franklin Roosevelt to
establish a solid bulwark of economic rights for the public – specifically,
as he put it, "the right to adequate protection from the economic
fears of old age, sickness, accident, and unemployment." Most
Americans associate Social Security only with the retirement – or old
age – benefit. Yet it was created to do much more, and it does.
As its original name suggests, Social Security is an insurance program
that protects workers and their families against the income loss that
occurs when a worker retires, becomes disabled, or dies. All workers
will eventually either grow too old to compete in the labor market,
become disabled, or die. OASDI insures all workers and their families
against these universal risks, while spreading the costs and benefits
of that insurance protection among the entire workforce. Currently,
70% of Social Security funds go to retirees, 15% to disabled workers,
and 15% to survivors.
Social Security is a "pay as you go" system, which means
the taxes paid by today’s workers are not set aside to pay their own
benefits down the road, but rather go to pay the benefits of current
Social Security recipients. It’s financed using the Federal Insurance
Contribution Act (or FICA) payroll tax, paid by all working Americans
on earnings of less than about $90,000 a year. While the payroll tax
is not progressive, Social Security benefits are – that is, low-wage
workers receive a greater percentage of pre-retirement earnings from
the program than higher-wage workers.
In the 1980s, recognizing that the baby boom generation would strain
this system, Congress passed reforms to raise extra tax revenues above
and beyond the current need and set up a trust fund to hold the reserve.
(See "Social
Security Isn’t Broken," Dollars and Sense.) Trustees
were appointed and charged with keeping Social Security solvent. Today’s
trustees warn that their projections, which are based on modest assumptions
about the long-term growth of the U.S. economy, show the system could
face a shortfall around 2042, when either benefits would have to be
cut or the FICA tax raised.
Those who oppose the social nature of the program have pounced on
its projected shortfall in revenues to argue that the program cannot – or
ought not – be fixed, but should instead be fundamentally changed.
Privatization proponents are seeking to frame the issue as a matter
of social justice, as if Social Security "reform" would primarily
benefit low-income workers, blue-collar workers, people of color, and
women. Prompted by disparities in life expectancy between whites and
African Americans and the racial wealth gap, a growing chorus within
the privatization movement is claiming that privatizing Social Security
would be beneficial to African Americans.
Opponents attack the program on the basis of an analogy to private
retirement accounts. Early generations of Social Security beneficiaries
received much more in benefits than they had paid into the system in
taxes. Privatization proponents argue those early recipients received
a "higher rate of return" on their "investment" while
current and future generations are being "robbed" because
they will see "lower rates of return." They argue the current
system of social insurance – particularly the retirement program – should
be privatized, switching from the current "pay-as-you-go" system
to one in which individual workers claim their own contribution and
decide where and how to invest it.
But this logic inverts the premise of social insurance. Rather than
sharing risk across the entire workforce to ensure that all workers
and their families are protected from the three inevitabilities of
old age, disability, and death, privatizing Social Security retirement
benefits would enable high-wage workers to reap gains from private
retirement investment without having to help protect lower-wage workers
from their (disproportionate) risks of disability and death. High-wage
workers, who are more likely to live long enough to retire, could in
fact do better on average if they opt out of the general risk pool
and devote all their money to retirement without having to cover the
risk of those who may become disabled or die, although they would of
course be subjecting their retirement dollars to greater risk. But
low-wage workers, who are far more likely to need disability or survivors’ benefits
to help their families and are less likely to live long enough to retire,
would then be left with lower disability and survivors’ benefits, and
possibly no guaranteed benefits. This is what the Social Security privatization
movement envisions. But you wouldn’t know it from reading their literature.
And when the myths about Social Security’s financial straits meet
another American myth – race – even more confusion follows. Here is
a look at three misleading claims by privatization proponents about
African Americans and Social Security.
Myth #1
Several conservative research groups argue that Social Security
is a bad deal for African Americans because of their lower life expectancies. "Lifetime
Social Security benefits depend, in large part, on longevity," writes
the Cato Institute’s Michael Tanner in his briefing paper "Disparate
Impact: Social Security and African Americans." "At every
age, African-American men and women both have shorter life expectancies
than do their white counterparts. … As a result, a black man or woman
earning exactly the same lifetime wages, and paying exactly the same
lifetime Social Security taxes, as his or her white counterpart will
likely receive a far lower rate of return." Or as the Americans
for Tax Reform web site puts it: "A black male born today has
a life expectancy of 64.8 years. But the Social Security retirement
age for that worker in the future will be 67 years. That means probably
the majority of black males will never even receive Social Security
retirement benefits."
The longevity myth is the foundation of all the race-based arguments
for Social Security privatization. There are several problems with
it.
First, the shorter life expectancy of African Americans compared to
whites is the result of higher morbidity in mid-life, and is most acute
for African-American men. The life expectancies of African-American
women and white men are virtually equal. So the life expectancy argument
can really only be made about African-American men.
Second, the claim that OASDI is unfair to African Americans because
their expected benefits are less than their expected payments is usually
raised and then answered from the perspective of the retirement (or "old
age") benefit alone. That is an inaccurate way to look at the
problem. Because OASDI also serves families of workers who become disabled
or die, a correct measure would take into account the probability of
all three risk factors – old age, disability, and death. Both survivor
benefits and disability benefits, in fact, go disproportionately to
African Americans.
While African Americans make up 12% of the U.S. population, 23% of
children receiving Social Security survivor benefits are African American,
as are about 17% of disability beneficiaries. On average, a worker
who receives disability benefits or a family that receives survivor
benefits gets far more in return than the worker paid in FICA taxes,
notwithstanding privatizers’ attempts to argue that Social Security
is a bad deal.
Survivors’ benefits also provide an important boost to poor families
more generally. A recent study by the National Urban League Institute
for Opportunity and Equality showed that the benefit lifted 1 million
children out of poverty and helped another 1 million avoid extreme
poverty (living below half the poverty line).
Finally, among workers who do live long enough to get the retirement
benefit, life expectancies don’t differ much by racial group. For example,
at age 65, the life expectancies of African-American and white men
are virtually the same.
President Bush’s Social Security commission proposed the partial privatization
of Social Security retirement accounts, but cautioned that it could
not figure out how to maintain equal benefits for the other risk pools.
The commission suggested that disability and survivor’s benefits would
have to be reduced if the privatization plan proceeds.
This vision is of a retirement program designed for the benefit of
the worker who retires – only. A program with that focus would work
against, not for, African Americans because of the higher morbidity
rates in middle age and the smaller share of African Americans who
live to retirement.
Myth #2
African Americans have less education, and so are in the work force
longer, than whites, and yet Social Security only credits 35 years
of work experience in figuring benefits. Tanner says, "benefits
are calculated on the basis of the highest 35 years of earnings over
a worker’s lifetime. Workers must still pay Social Security taxes
during years outside those 35, but those taxes do not count toward
or earn additional benefits. Generally, those low-earnings years
occur early in an individual’s life. That is particularly important
to African Americans because they are likely to enter the workforce
at an earlier age than whites…."
This claim misinterprets the benefit formula for Social Security.
Yes, African Americans on average are slightly less educated than whites.
The gap is mostly because of a higher college completion rate for white
men compared to African-American men. But the education argument fails
to acknowledge that white teenagers have a significantly higher labor
force participation rate (at 46%) than do African-American teens (29%).
The higher labor force participation of white teenagers helps to explain
why young white adults do better in the labor market than young African-American
adults. (The racial gaps in unemployment are considerably greater for
teenagers and young adults than for those over 25.)
These differences in early labor market experiences mean that African-American
men have more years of zero earnings than do whites. So while the statement
about education is true, the inference from education differences to
work histories is false. By taking only 35 years of work history into
account in the benefit formula, the Social Security formula is progressive.
It in effect ignores years of zero or very low earnings. This levels
the playing field among long-time workers, putting African Americans
with more years of zero earnings on par with whites. By contrast, a
private system based on total years of earnings would exacerbate racial
labor market disparities.
Myth #3
A third claim put forward by critics of Social Security is that
African-American retirees are more dependent on Social Security than
whites. Tanner writes: "Elderly African Americans are much more
likely than their white counterparts to be dependent on Social Security
benefits for most or all of their retirement income." Therefore,
he concludes, "African Americans would be among those with the
most to gain from the privatization of Social Security – transforming
the program into a system of individually owned, privately invested
accounts." Law professor and senior policy advisor to Americans
for Tax Reform Peter Ferrara adds, "the personal accounts would
produce far higher returns and benefits for lower-income workers,
African Americans, Hispanics, women and other minorities."
It’s true that African-American retirees are more likely than whites
to rely on Social Security as their only income in old age. It’s the
sole source of retirement income for 40% of elderly African Americans.
This is a result of discrimination in the labor market that limits
the share of African Americans with jobs that offer pension benefits.
Privatizing Social Security would not change labor market discrimination
or its effects.
Privatizing Social Security would, however, exacerbate the earnings
differences between African Americans and whites, since benefits would
be based solely on individual savings. What would help African-American
retirees is not privatization, but rather changing the redistributive
aspects of Social Security to make it even more progressive.
The current formula for Social Security benefits is progressive in
two ways: low earners get a higher share of their earnings than do
higher wage earners and the lowest years of earning are ignored. Changes
in the formula to raise the benefits floor enough to lift all retired
Social Security recipients out of poverty would make it still more
progressive. Increasing and updating the Supplemental Security Income
payment, which helps low earners, could accomplish the same goal for
SSI recipients. (SSI is a program administered by Social Security for
very low earners and the poor who are disabled, blind, or at least
65 years old.)
The proponents of privatization argue that the heavy reliance of African-American
seniors on Social Security requires higher rates of return – returns
that are only possible by putting money into the stock market. Yet
given the lack of access to private pensions for African-American seniors
and their low savings from lifetimes of low earnings, such a notion
is perverse. It would have African Americans gamble with their only
leg of retirement’s supposed three-legged stool – pension, savings,
and Social Security. And, given the much higher risk that African Americans
face of both death before retirement and of disability, it would be
a risky gamble indeed to lower those benefits while jeopardizing
their only retirement leg.
Privatizing the retirement program, and separating the integrated
elements of Social Security, would split America. The divisions would
be many: between those more likely to be disabled and those who are
not; between those more likely to die before retirement and those more
likely to retire; between children who get survivors’ benefits and
the elderly who get retirement benefits; between those who retire with
high-yield investments and those who fare poorly in retirement. The "horizontal
equity" of the program (treating similar people in a similar way)
would be lost, as volatile stock fluctuations and the timing of retirement
could greatly affect individuals’ rates of return. The "vertical
equity" of the program (its progressive nature, insuring a floor
for benefits) would be placed in greater jeopardy with the shift from
social to private benefits.
Social Security works because it is "social." It is America’s
only universal federal program. The proposed changes would place Social
Security in the same political space as the rest of America’s federal
programs – and African Americans have seen time and again how those
politics work.
William E. Spriggs is a senior fellow with the Economic Policy
Institute and was formerly the executive director of the National
Urban League Institute for Opportunity and Equality.