Hispanic Social Security Reform

The current Social Security system provides the Hispanic community with valuable benefits. Hispanics receive better returns on the taxes they contribute to the Social Security system in greater numbers than other workers, and elderly Hispanics rely on Social Security benefits for a greater share of their income than the rest of the population (by ethnicity). Closing the Social Security shortfall is particularly important to the middle aged Hispanic community. As a young population that is rapidly aging and that receives more in return for its contributions to Social Security than others, Hispanics have much invested in the future solvency of the system.

The Hispanic community should be wary of changes that seriously threaten the benefits that they receive from the current system, under the guise of restoring solvency. Plans such as President Bush’s that rely solely on benefit reductions to close Social Security’s shortfall, and that would place the greatest burden on younger workers, would be more detrimental to the Hispanic community (and other communities of color) than alternative reforms. The Hispanic community also would be harmed by private-account plans that shrink the social insurance aspects of Social Security by linking each person’s benefits more directly to that person’s tax contributions without regard to whether the worker has earned low wages or encountered some major financial misfortune.

As is true for most Americans, retirement security for Hispanics needs to be strengthened. But substantially scaling back Social Security would have the opposite effect, as it is the one form of retirement security that currently works well for the Hispanic community. Hispanics (and others) should instead be given incentives to increase the amounts they save for retirement and thereby to bolster their retirement security. This can be done by reforming the current system of retirement tax incentives to provide greater incentives and opportunities for low-and middle-income Americans workers and their families to create and build assets for retirement.

• Plans to restore Social Security solvency that rely largely on reductions in Social Security benefits would tend to be more harmful to Hispanics than plans that employ a balanced mix of benefit reductions and progressive revenue changes, since Hispanics disproportionately gain from Social Security benefits. Simply stated, Hispanics would tend to be harmed disproportionately if large cuts are made in a system from which they disproportionately benefit.
  
• Plans that rely largely on benefit cuts to restore solvency to Social Security are would have a negative impact on Hispanics, compared to plans that employ a balanced mix of benefit reductions and progressive revenue changes.
  
• Hispanics are likely to do worse under reform plans that make young workers and future generations bear the brunt of the sacrifices needed to preserve Social Security.
  
• The President’s Social Security plan fails on both of these counts. It relies entirely on back loaded benefit cuts that would hit young workers and future generations hard.
  
• Replacing Social Security with private accounts would be especially harmful to Hispanics. Hispanics benefit disproportionately from Social Security’s social insurance aspects and redistributive nature, which would be eliminated in a pure private account system.
  
• The Hispanic population today is overwhelmingly young, but it is expected to age rapidly over the coming decades. Reforms that shield current retirees and spare baby boomers much pain, while making later generations of retirees bear the heaviest load, would be especially detrimental to Hispanics.To be sure, all generations — both old and young — benefit from Social Security, as it serves and is expected to continuing serving as a basic form of income security for the survivors of deceased workers, people with disabilities, and retirees. But, the system faces a fiscal shortfall that needs to be addressed. For Hispanics, it is particularly important that this shortfall not be closed by measures that largely spare the baby boomers and place the burden of reform almost entirely on younger generations.
  
• The President’s Social Security proposals fare poorly on both of these counts. The plan that the President has proposed relies entirely on benefit cuts to reduce the Social Security shortfall. Furthermore, the President’s plan largely exempts the baby-boom generation from significant benefit reductions and makes later generations bear much steeper cuts as a result. Such back loaded cuts would fall especially heavily on Hispanics.Closing the Social Security shortfall is particularly important to the Hispanic community. As a young population that is rapidly aging and receives more in return for its contributions to Social Security than others, Hispanics have much invested in the future solvency of the system. The President’s plan, however, would restore solvency in a way that is more detrimental to Hispanics than various other reforms would be.
  
• There has been a campaign to sell the Hispanic community on the notion that Hispanics would fare better if Social Security were replaced by private accounts. Careful analysis shows that the opposite is true. Hispanics benefit disproportionately from the various types of insurance that Social Security provides and from Social Security’s redistributive nature. Pure private account plans would eliminate this redistribution, as they would tie each worker’s benefits directly to that worker’s contributions to his or her private account. This would be harmful to the Hispanic community.

Strengthening Retirement Security for Hispanics

Hispanics in general tend to be ill-prepared for retirement related to how much they have accumulated in pensions and other retirement savings. The solution to this problem is not to contract or dismantle the Social Security system, the one form of retirement security that works especially well for Hispanics.

Instead, a better solution is to revamp and improve the system of tax-preferred saving accounts, such as IRAs and 401(k)s. In their current form, those accounts provide the most powerful incentives and most generous tax benefits to people who have the highest incomes (and the least need for incentives and subsidies to help them save adequately for retirement). To better secure Hispanics’ retirement, the current system of tax incentives for retirement saving should be reformed to provide greater incentives and opportunities for middle- and low-income Americans to save. The National Council of La Raza has also recently suggested a number of relatively modest adjustments to the Social Security system that would benefit the Hispanic community and should be considered as part of reform.

• Historically, Hispanic workers have far lower participation rates in employer-sponsored retirement plans than either whites or blacks. A recent study by the Employee Benefits Research Institute found that of the 16.3 million Hispanic wage and salary workers aged 21-64 in 2003, only 29 percent participated in an employer-sponsored retirement plan. This compares to a participation rate of 53 percent among white wage and salary workers in the same age range and 45 percent among black wage and salary workers.
  
• The Social Security Administration reports that, as of 2002, only 26 percent of elderly Hispanics aged 65 and over had income from assets. By contrast, 55 percent of the elderly population as a whole received income from assets. Similarly, only 13 percent of the Hispanic elderly population received income from private pensions or annuities while 29 percent of the elderly population as a whole did.
  
• Consequently, Hispanics tend to rely on Social Security for a larger share of their retirement income. In 2002, some 41 percent of elderly Hispanic Social Security beneficiaries relied on Social Security for all of their income, compared to 22 percent for Social Security beneficiaries as a whole.

The Danger of Private Accounts

In their most extreme form, private account plans would eliminate these redistributive aspects of Social Security, since the level of income that people could draw from the accounts would be determined solely by the size of a person’s contributions to his or her account and the rate of return on the account’s investments (rather than also being determined in part by circumstances such as whether the person had low earnings or whether his or her spouse or parent had died).

Scaling back Social Security benefits to pay for private accounts consequently could adversely affect Hispanics, since they benefit disproportionately from the social insurance and redistributive features of the current Social Security system and receive a higher rate of return than the rest of the population on the contributions they make to the system.

Despite this, some reports have claimed that Hispanics would be better off if Social Security were entirely replaced by private accounts. For instance, a widely publicized 1998 Heritage Foundation report asserted that the “Social Security system’s rate of return for most Hispanic Americans will be vastly inferior to what they could expect from placing their payroll taxes in even the most conservative private investments. In a separate analysis, we have explained the severe shortcomings with the Heritage report (which has been sharply criticized by the Social Security actuaries and widely discredited) and other reports making such claims.

Future Generations Could Bear the Heaviest Load

The Hispanic population today is overwhelmingly young, but it is expected to age rapidly over the coming decades.

• Only five percent of the 42 million U.S. residents of Hispanic origin are aged 65 or older today. This compares to 12 percent of the total U.S. population that is 65 or older.
  
• The Census Bureau projects this proportion will triple by 2050, with the share of the Hispanic population that is aged 65 or older rising to 15 percent by that year.
  
• Similarly, Hispanics are expected to compose a far larger share of the elderly population in future years than they do today. Currently, 6 percent of the population aged 65 or older is Hispanic. However, the Census Bureau projects that by 2050 Hispanics will make up 18 percent of the elderly population.

Due to these demographics, Social Security changes that shield current retirees and spare baby-boomers much pain while making later retirees bear the heaviest loads would be especially detrimental to Hispanics. To be sure, all generations — both old and young — benefit from Social Security, as it serves and is expected to continuing serving as a basic form of income security for the survivors of deceased workers, people with disabilities, and retirees.

But, the system faces a fiscal shortfall that needs to be closed. For Hispanics, it is particularly important that the shortfall not be closed by measures that largely spare baby boomers and place the burden almost entirely on younger workers. Hispanics would fare better under approaches that more equitably spread the burden of reform across generations. The Bush Administration’s Social Security plan fails to do this.

Under the Administration’s proposals, Social Security benefit reductions would be modest for those retiring in the next couple of decades, but would grow steadily deeper over time, with each new group of retirees facing sharper benefit cuts. As a result, today’s younger workers, including many Hispanics, would face dramatically larger benefit reductions than earlier retirees.

Specifically, the President’s plan exempts those aged 55 or older from any cuts in Social Security benefits. For those retiring in or after 2012, the first year in which new retirees would begin to be subject to benefit reductions, the proposed cuts would start small but mount over time. The generational imbalance in the President’s plan is further exacerbated by the financing of the private accounts that the President has proposed. To finance the “transition” to these accounts, the federal government would borrow trillions of dollars. That would greatly magnify the debt burden on younger generations. This “robbing Peter to pay Paul” approach is inherently selfish.

Because of the borrowing undertaken to finance the private accounts, the President’s Social Security proposals would add $4.9 trillion (in current dollars) to the national debt over the plan’s first 20 years, with several trillion dollars in additional debt added in the decades after that. Under the President’s plan, this debt would eventually be paid off through additional reductions in the Social Security benefits of young workers. In the words of economist Lawrence Kotlikoff, who himself favors private accounts, “the dirty little secret underlying most Social Security privatization schemes is that they head precisely down this road” of “dumping the entire…bill in our kids’ laps. Doing that would not be in the interests of the Hispanic community, nor any American community for that matter

Social Security Reform

Preserving Social Security for future generations is one of the nation’s top priorities. Demographic changes in our country are looming and require us to act now to ensure the solvency of the Social Security system. The current situation offers opponents of Social Security the best chance they have had in six decades of trying to phase-out the program

Historically, Social Security has made a secure retirement possible for tens of millions of Americans and should remain so for future generations. I believe we should preserve Social Security's guaranteed, lifetime, inflation-protected benefit; and protect disabled workers and their families. Maintain the system's progressive benefit structure. Strengthen the Social Security system, while ensuring that women and other economically-disadvantaged groups are protected.

As the baby boomer population ages and enters into retirement, the need for Social Security reform becomes even more apparent. Federal Reserve Chairman Alan Greenspan urged Congress in February of 2004 to deal with the country’s escalating budget deficit by cutting benefits for future Social Security retirees.

It is my belief that Social Security is a sacred bond between the US Government and the citizens of our country. President Bush's proposals during his first term would have required borrowing trillions of dollars to pay for his plans; I would not support any plans that put this country any deeper in debt or any changes to Social Security -- including privatization schemes -- that require us to borrow any additional funds.

We have a responsibility to fulfill the promise of Social Security, not undermine it. We also have a duty to ensure that we do not create an inter-generational conflict. It is important that everyone, especially Baby Boomers, plan for their retirement by supplementing Social Security with personal savings, pensions, and other financial investments.

However, reducing social security benefits and replacing (some of) the lost benefits with private investment accounts is gambling even if the accounts earn a relatively optimistic rate of return, and even if the accounts are limited to conservative investment options. The reason why private investment accounts are risky is because people don't know how long they will live. Someone living to (say) 95 is going to do much worse with private investments, simply because the privately invested money is going to run out well before they die.

Sen. Dianne Feinstein of California said about private accounts: "I strongly oppose private accounts, which could cost $1 trillion or more and still fail to improve the financial condition of Social Security. Unless I see a proposal that protects the fiscal health of Social Security and does not dramatically increase the national debt, I will continue my opposition."

Soft pro-privatization propaganda has been getting more pointed over the last three years, even as the actuaries at the Social Security Administration have been reporting that the predicted Social Security funding shortfalls are receding further and further into the future.

Half of current retirees are going to live longer than those who previous retiree populations. This half will either have to withdraw money more slowly or will exhaust their private investment accounts long before they die. So with private accounts, those who die early end up with some of their money going to their heirs, and those who die late end up potentially in poverty. Only the hypothetical "average" person the one who dies at an average age, having exactly exhausted his/her private investments at exactly the right time is going to do as well as any "predicted" outcome for private investment accounts.

The Bush administration utters propaganda about Social Security's insolvency and the need for "long range changes" in the program, and the sooner the better. Similar verbiage is now contained in the mailings that the SSA sends out to all Americans who pay into the system, describing their lifetime earnings and projected benefits.

The bottom line is this entire debate is about ideology -- between people who believe in the benefits Social Security has brought America in the last three-quarters of a century and those who think it was a bad idea from the start. There is an honest debate to have on this point, a values debate. Only, the White House understands that the belief that Social Security was always a bad program isn't widely shared by Americans. So they have to wrap their effort in a package of lies, harnessing Americans' desire to save Social Security in their own effort to destroy it.

The current method of wage indexation was created in 1977, under the Carter Administration. Wage indexation makes it impossible to "grow our way" out of the Social Security problem. If the economy grows faster and wages rise, this produces more tax revenue. But the faster wage growth also means that we owe more in Social Security benefits. This has produced a never-ending cycle of higher tax burdens, even during periods of robust economic growth. It is the classic case of the dog chasing his tail around the tree; he can run faster and faster and never make any progress.

Congress usually addressed the built-in funding problem of social security by raising payroll taxes (from 2 percent in 1937 to 12.4 percent today). Congress has raised Social Security taxes more than 30 times. Social security system is projected to reach a day of reckoning: Retiree benefits will exceed payroll tax receipts, and to pay its bills the system will have to begin redeeming billions of dollars in special Treasury bonds that have piled up in its trust fund.

Under current law benefits are calculated by a "wage index" -- but because wages grow faster than inflation, so do Social Security benefits. If we don't address this aspect of the current system, we'll face serious economic risks. If we borrow $1-2 trillion to cover transition costs for personal savings accounts and make no changes to wage indexing, we will have borrowed trillions and will still confront more than $10 trillion in unfunded liabilities. This could easily cause an economic chain-reaction: the markets go south, interest rates go up, and the economy stalls out. To ignore the structural fiscal issues -- to wholly ignore the matter of the current system's benefit formula -- would be irresponsible.

An average retiree in 2050 would be scheduled to receive close to 40 percent more (in real terms) in benefits than an average retiree today -- and yet there are no mechanisms in place to produce the revenue to pay out those benefits. No one on this planet can tell you why a 25-year-old person today is entitled to a 40 percent increase in Social Security benefits (in real terms) compared to what a person retiring today receives.

Baby-boomers were asked to overpay into the system to create a reserve to cushion the stresses that would be created when their oversized generation retired. The fiscal stresses created by the retirement of the baby-boom generation will build slowly over-time as the generational cohort moves through retirement. Needless to say, none of this means that some funding tinkering won't be necessary in the system down the road.

One option to meet those benefit levels would be to raise the age at which people receive benefits. If we followed the formula used when Social Security was first created and make the age at which you receive Social Security benefits above the average age of mortality -- we'd be looking at raising the benefit age to around 80.

Another way to meet those benefit levels is through the traditional way of raising taxes. According to the latest report of the Social Security Trustees, the current system's benefit formula would require some $10 trillion in tax increases over the long term. We'd therefore need to raise the payroll tax almost 20 percent simply to provide wage-indexed benefit levels to those born this year. Social Security's financing was restructured in the early 1980s. Payroll taxes were intentionally raised substantially over and above current needs so as to build a 'trust fund' that could be drawn down when the surge of baby-boomer retirements began early in the 21st century. In essence, opponents of President Bush's plan to rescue and modernize Social Security increasingly are claiming "there is no crisis." However:

• The "Social Security Trust Fund" is essentially an IOU from the federal government. From the taxpayers' perspective, the Trust Fund is nonexistent. When Social Security starts needing Trust Fund assets to pay benefits, taxpayers will be expected to pony up cash - $5 trillion worth - to restore funds spent from what many mistakenly believe is a genuine trust fund. Social Security will need to tap the "Trust Fund" in approximately 2018. But, because the federal government has gotten used to spending Social Security taxes as if they were general revenues, the Social Security cash crunch - the "crisis," if you will - actually begins in 2009, the year the Social Security revenue surplus begins to shrink.
  
• America has options to solve the crisis: Reduce benefits to seniors, or increase savings to avert the cash crunch. President Bush is choosing the latter option. Doesn't it make sense for critics to work with the White House to craft the best plan possible, rather than deny action is needed? Underscoring that difficulty, Sen. Arlen Specter, a prominent moderate Republican, has expressed his opposition to cuts in promised Social Security benefits for future retirees with the phrase "I strongly oppose this approach." Sen. Specter said this during an interview at the WTAE-TV studio in Pittsburgh. But after a closer examination, "I think it is unwise," he said. "I believe the seniors ought to be reassured that their Social Security benefits are solid."
  
• There are $1.8 trillion in U.S. Treasury securities in the U.S. Social Security Trust Fund. It is imperative that the Democrats ask Bush whether he intends to honor that obligations and force him to make a public proclamation of his steadfast commitment to do so. The Democrats must take the lead in committing themselves to honor those obligations.

On the issue of privatization, I had some time ago considered the idea of placing a relatively small portion of my benefits in an investment account, providing that the “security” aspect of Social Security was retained and the investment was under professional management. However, with the severe fluctuations of the stock market, I have since rejected that idea. This situation unites Democratic policy groups from the most left leaning labor-liberals to the newest New Dems in believing that the Bush Social Security phase-out plan is bad policy for America. Democrats have plenty of things more important to do right now than to fight amongst themselves. Democratic centrists are signaling that they might support private accounts only with conditions Republicans likely would find difficult to accept.

Most policy makers agree that the rate of growth of this program, as well as the oversight of its expenditures, must be addressed to ensure its integrity and preservation. Opponents say the emerging Bush proposal doesn't allow younger workers to invest up to 4 percent of their payroll taxes in private accounts, instead, it allows them to divert 4 percentage points of their contribution to their own private account. Even this, while accurate, leaves a misleading impression.

Social Security portion of the payroll tax amounts to 12.4% of your salary up to about $87,000 annually. The employee kicks in 6.2% and the employer contributes 6.2% as well. What the president is proposing is that individuals can divert roughly 4 of those 6.2 percentage points into their private investment account. What percentage would that be of the annual contribution to the Social Security for the given worker? About 30%.Saying that individual workers are merely taking 2% or now 4% out of their contribution makes it sound like a nominal amount. Just enough to give a trial run to private accounts. The more accurate description -- 30% of their contribution to Social Security -- makes it sound like a much bigger deal. It's understandable that the White House would prefer the misleading description. If we choose to borrow money (from ourselves) to transition to privatization of Social Security, it will have a devastating effect on the national debt. Just to transition to this method would cost taxpayers at least a trillion dollars.

Currently:

• The United States has a bit over $7 trillion in accumulated national debt .It was borrowed over what happens to be the span of my lifetime -- the last thirty-five years -- and especially over the last twenty-five years
  
• After 1980 we started borrowing money big-time to finance our deficits -- in large part because of tax cuts on high-income earners. However you want to slice it, we started spending substantially more than we were taking in tax revenue. So where did we borrow the money?
  
• $4 trillion of that debt was borrowed on the open market -- individual Americans have them in their investment portfolios, or pension funds hold them, or the Chinese, Japanese and the Saudis and others have them in bonds.
  
• $3 trillion of those dollars we needed to fund the 1980s and 1990s deficits we managed to borrow closer to home. We borrowed it from the Social Security (and a few other government) trust fund(s).
  
• Almost the entirety of President Bush's Social Security phase-out plan comes down to a simple proposition: finding out how not to pay it back. Now, admittedly, this is an approach that the president is rather familiar with from his own business career at various failed energy companies. But it is, in so many words, a straight up con -- one of vast scale, and one which virtually no one in the media ever frames in just these terms.
  
• So why does the president believe he can get away without making good on the debt to the folks who pay Social Security taxes, who are overwhelmingly low and middle-income wage earners (since no one pays Social Security tax on investment income or wage and salary income over about $85,000 a year)? Isn't it obvious? Because he thinks they're an easy mark.
  
• If anything, the fact that a sizeable portion of our huge national debt is owed (in the aggregate) to ourselves would seem to be a good thing since it gives us in extremes at least some flexibility on repayment. But to the president this is a reason to abolish Social Security so the money doesn't have to be paid back at all. As I have said, the challenges we face over the next several decades aren't really Social Security problems but national indebtedness problems, though the issues are clearly related.
  
• One obvious and immediate way to relieve long-term pressures on Social Security financing is to reduce the national debt ... by ending our habit of running huge annual deficits or even better, by paying down some of our accumulated debt (there are complicated macro-economic questions related to this second point; but in general it's correct.)
  
• President Bush presided over the biggest negative fiscal turnaround in American history, taking the country from a modest annual surpluses to the biggest deficits -- at least in non-adjusted dollar terms -- in American history.
  
• The Federal government should be paying down debt (not running $412 billion deficits) so it will have the borrowing capacity to pay off the obligations to the Trust Fund.
  
• Social Security must maintain a "guaranteed benefit" that prevents any retiree from falling below the poverty line. Any proposal "must be fiscally responsible." Can any proposal that requires $2 trillion in additional borrowing on top of our existing problem with accumulating national indebtedness be considered "fiscally responsible"?
  
• President Bush has done more than any other president and perhaps any other single American ever to endanger Social Security's future. Across the board, it's just one big scam.

African American Social Security Reform

Thoughts to consider when debating Social Security reform:

• Life expectancy for black men is shorter than whites, and black women. Yet that truth is not a compelling reason to embrace private retirement accounts.
  
• African-Americans don’t follow traditional work histories of others. Most make money as they age, past the prime years that Whites make most of their money. The peak earning age is different.
  
• With privatization introduced, basically you don’t have your money in long enough to make it work for you. With privatization, you need your money in for longer time.
  
• About 75 percent of black beneficiaries rely on Social Security for at least half their income.
  
• Approximately 45 percent of black beneficiaries rely on Social Security for 90 percent or more of their income.
  
• Approximately 37 percent of black beneficiaries rely on Social Security for all of their income. Blacks rely heavily on Social Security because of a lack of other income in retirement, because:
  
• Twenty-nine percent of blacks have asset income, they reported, compared with more than 63 percent of whites
  
• In 2000, 33 percent of blacks age 65 and older with income reported receiving income from pensions, compared to 43 percent of whites 65 and older
  
• In 2000, 25 percent of blacks age 65 and older with income reported receiving income from interest relative to 66 percent of comparable whites
  
• In 2001, 22 percent of black elderly ages 65 and older were poor, compared to 9 percent of white elderly. If not for Social Security, the poverty rate for older blacks would more than double from 22 percent to 64 percent
  
• Maya Rockeymoore, Congressional Black Caucus Foundation Vice President of Research and Programs wrote in June 2005 that 17 percent of blacks received Social Security disability benefits despite representing 12 percent of the population, and that 68 percent of blacks are kept out of poverty because of disability benefits.

Why the Privatization Advocates Are Wrong

• The crisis is that there are three workers now for each retiree collecting a check. Compare that to the 1930s when the worker- to check-receiving retiree ratio was about 14-1.
  
• With the U.S. population growing older and a huge segment of Baby Boomers poised to retire in the next decade or so, the country is moving dangerously close to running out of money to cover everyone.
  
• 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.

• 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.

Looking at Social Security Reform Through Socioeconomic Group

High-Income Retirees: This group would probably prefer a reform that cuts benefits to one that increases their taxes (that is, if both reforms cost the same). Benefit cuts keep richer retirees in greater control of their money, allowing them to invest it as they see fit (traditionally, this group achieves very good rates of return on their saving). Thus, for those in this group willing to save a bit more, reform will likely have little effect on retirement income. Nevertheless, there are too few high-income retirees to carry the entire burden of reform. 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.

Average-Income Retirees: Middle-class retirees are less prepared for their own retirement; and unlike poor retirees, they can afford to do more to prepare. Because most retirees fall into this socioeconomic group, the success of Social Security reform rests on their willingness and ability to make adjustments in their approach to retirement. Given the eventual shortfall in Social Security revenues, it seems almost inevitable that the middle class will need to take on a larger share of the burden for its own retirement.

To do this, the middle class needs to enter retirement with significantly more private assets. Currently, half of all retirees go into retirement with few assets. Three-quarters have private savings—in retirement accounts, homes, and other assets—worth less than government-promised benefits (Social Security and Medicare) from future taxpayers. The middle class may also need to extend their work lives. Today, individuals retire on average for about one-third of their adult lives. Once the Baby Boomers retire, close to one-third of all adults are scheduled to be Social Security beneficiaries. In effect, unless most middle-class retirees work and save more, their children will have to support them through higher taxes.

Low-Income Retirees: Protecting the elderly from poverty is Social Security’s primary purpose. Poverty rates for certain groups of retirees remain high—16 percent for divorcees and 21 percent for those who have never married. The burden of reform will not fall equally on all retirees. One way or another, all Social Security reform proposals will have to demand more saving, work, or taxes from the middle class—a fact that politicians are often reluctant to acknowledge. The middle class is, after all, a majority of both beneficiaries and taxpayers. By first deciding how they want different groups of retirees to be affected by reform, policymakers can better craft proposals that bring about the changes they intend.

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.

Myths concerning African Americans and Social Security

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. 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.

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.

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.

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.

"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. 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. 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.

Privatization Advocates

Powerful advocates for privatization include libertarian and conservative think tanks and advocacy groups such as the Cato Institute, the Heritage Foundation, Americans for Tax Reform, and Citizens for a Sound Economy, all driven by an ideological commitment to the abolition of federal social programs.

Wall Street too is thirsty for the $1.4 trillion that privatization would funnel into equities if the taxes collected to support the Social Security system were invested privately rather than reinvested in federal government bonds. That’s not to mention the windfall of fees privatization would deliver for banks, brokerage houses, and investment firms.
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.

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.)

President Bush, just after he took office appointed a commission to examine privatizing the Social Security system. The commission could not figure out how to maintain payments to current recipients while diverting tax dollars to the savings of current workers, nor could it resolve how to cover the benefits of the disabled or resolve issues surrounding survivors’ benefits. Although the president did not succeed in carrying out Social Security privatization in his first term, he has made the partial privatization of Social Security retirement accounts the top priority of his second-term domestic agenda.

As the nation faces years of adjusting its public and private budgets to meet the long-term threat of terrorism, it must address its other societal choices with candor. Promising something for nothing or exempting large portions of the population from sacrifice is not in keeping with the spirit that historically unites the nation. Social Security’s current dilemma is that it is inflexible in meeting national priorities, whether they be combating terrorism or addressing the needs of children and the oldest and poorest among the elderly themselves.

Whatever reforms are undertaken we must not dodge the problems associated with a retirement age policy, that threatens economic growth by scheduling large declines in adult employment rates, and that induces many to retire when their income may become inadequate decades after they retire. At the same time, we should attempt to increase resources for the poorest of the elderly. Our system has the resources to provide a basic benefit for everyone at above a poverty level, and that should be the first goal of any reform.