Title: The Implications of Social Security Reform for Minorities
1- The Implications of Social Security Reform for
Minorities
2SOCIAL SECURITY INTRODUCTION
- To understand the implications of any changes
made to Social Security, we must first understand
the current system. - Technically, Social Security is race-neutral.
- People in identical economic/family situations
are treated equally. - Problem all racial and ethnic groups arent
equal. - Minorities have different earnings patterns, life
expectancies, retirement savings, and disability
rates. - Minorities rely more heavily than whites on
Social Security benefits as an income source
during retirement.
3 SOCIAL SECURITY BY RACE
4Reasons Minorities Need Social Security
- Less likely to have pensions
- This difference likely to continue far into
future - Among current workers 21 years and older, fewer
minorities have pension plans than whites. - Greatest difference minorities less likely to
have other assets that produce income.
5Benefits as a Proportion of Income
6Higher Minority Poverty Rates
7 Minority Gains from Social Security
- The progressive benefit formula of the current
program helps low earners. - A disproportionate share of low earners are
minorities - Benefit formula gives low-earners a higher
percentage of their pre-retirement earnings than
high-wage workers. - BUT the payroll tax is regressive.
- Since minorities wages are lower, on average, a
high percentage of their earnings are likely to
be within the taxable base. - The Earned Income Tax Credit (EITC) was
originally designed to offset the regressive
payroll tax for low-earning families with
children.
8Minority Gains from Social Security
- Benefits Depend on Earnings. There is a
substantial difference in earnings by race. - Example 1995 median earnings in Social Security
covered employment - White 16,360
- Black 11,991
9Years in the Workforce
- Years out of the workforce decreases Social
Security benefits because they are calculated
based on the average of a workers highest 35
years of earnings. - Minorities have more years out of the workforce
than whites.
10Benefits by Race
- A larger percentage of whites receive retirement
benefits than minorities. - A larger percentage of minorities receive
disability and survivor benefits than whites. - Low-earners have higher rates of disability than
high-earners. - Types of Benefits
- Retirement Disability
Survivors - White 72 12 16
- Black 53 25 22
- Other 51 32 17
11Life Expectancies by Race
- People who live longer receive benefits for a
longer period of time, so they have higher
lifetime retirement benefits from Social
Security. - Lower life expectancy groups receive more
disability and survivors benefits.
12Drawbacks for Minorities
- African American males often pay more into the
program than they ever receive in benefits - Even if they receive higher proportional benefits
because of progressivity, they receive them for a
shorter amount of time because of their shorter
lifespan. - Survivor benefits are limited and benefits paid
are not very high. - Personal accounts would allow workers to create a
nest egg for their families.
13Effects on Minorities
- Because of their lower life expectancies, Blacks
are affected more greatly than whites by the
inability to include the Social Security
investments they have made over their lifetimes
in their estates. - Upon death, the money they have invested will
leave their spouse and family, except in the
limited cases where their families receive
survivor benefits. - This money then benefits groups with longer
lifespan who receive benefits for a longer period
of time.
14Disability Benefits
- The disability benefits come from a separate
program that is financed by a separate tax. - Disability benefits are received at a
disproportionately higher rate by minorities, but
the smaller disability benefits do not entirely
make up for the fact that white workers receive
more in retirement benefits.
15Wrap-Up of the Current System
- The overall implications of the current Social
Security system for minorities are unclear. - Minorities have lower life expectancies, so the
total benefits they receive on average are less
than those of Whites. - This drawback is partially offset by the
progressivity of the system and by minorities
greater receipt of survivor and disability
benefits.
16The Alternative the Presidents New System
- The Presidents Commission to Strengthen Social
Security - 16-member bipartisan Commission made up of former
U.S. Representatives, Consultants to the World
Bank and the CEO of Black Entertainment
Television - Established through Executive Order 13210 to
provide recommendations for modernizing and
restoring fiscal soundness to the Social Security
System - Reported three reform models to the President,
all involving personal accounts. - We will first focus on the structure and
administration of personal accounts and then on
the most popular proposal, Reform Model 2
17Structure of Personal Accounts
- Centralized Approach
- Payroll collections are transferred to a
governmentappointed central administrator using
the existing Social Security payroll tax system - Workers choose among a limited number of
low-cost, diversified investment index funds - Governing board contracts fund management to
multiple private managers on a competitive basis
18Structure of Personal Accounts
- Decentralized Approach
- Payroll collections transferred directly from
employers to diversified, private-sector
investment funds that satisfy requirements - Workers have investment choices through their
employers a wide-range of private-sector funds
are available and switching is permitted - Government still interacts with each fund and the
employers to enforce compliance with regulations
19The Two-Tier Approach
- Developed to address foreseen problems with both
centralized and decentralized approaches - Collections are transferred to central
administrator using the existing payroll system
administrator verifies that correct amounts are
submitted by each worker - Funds in both Tiers cannot charge fees for entry
and exit, only an annual charge that is a
percentage of assets - Investments for each employee are made through
central administrator into Tier 1
20Tier 1
- Workers select a balanced fund or any combination
offered by the Thrift Savings Plan (TSP) for
federal workers - Balanced fund include corporate and government
bonds - Three risk levels (conservative, medium and
growth) include varied combinations of government
and corporate funds - TSP includes Government Securities Fund Fixed
Income Index Investment Fund Common Stock Index
Investment Fund Small Capitalization Stock Index
Investment Fund and International Stock Index
Investment Fund - Inflation-protected Bond Fund allows participants
to invest in Treasury Inflation Protected
Securities - Fund management auctioned off to private-sector
providers. For those who do not choose Tier 1,
their contributions must be invested into a
standard diversified fund on their behalf. - When employees reach a threshold balance, they
are allowed to invest accumulated contributions
in a Tier 2 qualified private-sector funds
21Tier 2
- Private-sector fund managers may offer broadly
diversified mutual funds certified by the
Governing Board in addition to the Funds offered
under Tier 1 - Funds must be diversified and reflect the
performance of many companies spanning all major
commercial sectors - Share of funds in individual corporations cannot
exceed strict limits set by Governing Board - More competition and choice than Tier 1
22Limitations in Changes to Investment Allocations
- Personal retirement accounts not intended for
long-term, short-sighted activities, such as day
trading - Changes in investment allocations limited to once
a year - Account information will be immediate through
- monthly mailed statements
- online account access
- automated calling
23Access to Personal Accounts
- Workers should not be allowed to consume funds in
their personal accounts in a manner that would
leave them impoverished during retirement and
dependent on the government for additional
resources - Personal accounts must provide a variety of
withdrawal options upon retirement, including the
ability to leave assets to loved ones upon death - Pre-retirement access to funds in personal
accounts should not be allowed, including
withdrawal by disabled persons - Commission suggests government action for those
who experience financial need before retirement
24Retirement Withdrawal Options
- Individuals should have immediate right to their
money only to the extent that they can support
themselves in the future in order to avoid
dependence on the government - Forced to take at least some of their money as an
annuity or gradual withdrawals - Annuity
- Pays fixed stream of money until person dies
- Inflation-indexed that protect against loss of
purchasing power - Standard annuities pay more early in retirement
to prevent loss of purchasing power - Gradual Withdrawal
- Allows individuals to receive fractions of their
over their expected lifetime - Any money left after death can be fully
bequeathed - Withdrawal schedule must be long enough to cover
expected lifetime of retiree and spouse - Lump-sum payments allowed only to prevent
impoverishment
25Protection for Spouses
- Personal account ownership must help provide for
current and former spouses welfare in proportion
to their contributions to the household - All account balances attributable to
contributions during marriage, and all earnings
on account balances brought into marriage, should
be equally divided in the event of a divorce - Account balances brought into marriage should not
be shared - Upon retirement, a two-thirds joint and survivor
annuity should be required unless both spouses
agree to an alternative consistent with the
distribution rules discussed earlier
26Reform Model 2
- Reform Model 2 Voluntary Progressive Personal
Accounts combined with an Inflation-Indexed but
More Progressive Traditional System - Pros
- Establishes voluntary personal accounts, without
raising taxes or requiring additional worker
contributions - Enables all future retirees to receive an
inflation adjusted Social Security benefit - New poverty protection
- Puts Social Security on fiscally sustainable path
27Key Elements
- Workers who have not reached age 55 (as of
January 1, 2002) would be given the opportunity,
starting in 2004, to redirect the lesser of
1,000/year or 4 of their payroll taxes, to a
personal account. - Traditional Social Security benefits would be
reduced by personal account contributions
compounded at a real interest rate of 2 . - Traditional Social Security benefits would be
indexed to price inflation rather than national
wage growth beginning in 2009.
28Key Elements Ctd.
- A minimum benefit provision would increase
benefits for 30-year minimum wage earners by
approximately 40 percent by 2018 relative to the
price indexed benefit level. - Benefits for widows would be increased to as much
as 75 percent of the combined benefits that would
be received by the couple if both were still
alive, versus 50-67 percent under current law. - In order to maintain the ability to pay benefits
throughout a 75-year period, additional revenue
would likely be taken from the General Fund of
the Treasury.
29Benefits
- Workers who opt for personal accounts
- Expect to higher benefits than the inflation
adjusted level currently paid, and the benefits
the existing system can afford in the future. - Workers who are currently aged 35 who retire in
2032, will have benefits with 17-32 percent
higher purchasing power than those received
today. - More progressive because
- Workers can only redirect a maximum of 4 percent
of payroll taxes on entire salary - Benefit levels paid to all low-waged workers are
raised - Workers who do not opt for personal accounts
- Initial benefit levels grow with inflation
- Low-wage worker in 2052 would receive benefits
that are 27 percent higher in real terms than
those received by a low-wage worker today
30Increased Benefits Under Model 2
31Fiscal Sustainability Assessment
- Model 2 improves Social Securitys financial
health and greatly reduces burden on future
workers - Current system is projected to show deficits as
soon as 2016 - Model 2 eliminates permanent deficits after a
75-year valuation period without relying on
general revenue transfers or higher taxes - Should eventually transform projected deficits
into perpetually rising surpluses
32Improvements Compared to Current Law
33Reduction in Rate of Growth in Long Term Costs
- New system will lessen the burden on future
generations of taxpayers from a projected 17 to
15 of taxable payroll by 2030 - By the end of the 75-year valuation period, the
programs expenditure as a percent of GDP would
fall below its current level
34Transition Financing
- Would reduce fiscal pressures on the rest of the
federal government relative to current law - No new transition cash would be needed before
2010 when 4 billion would be required and then
would grow to a maximum 73 billion in the years
2015-2016 - Required transition funds would decrease until
2029, when the new system would be permanently
less expensive than the old - Total transition investment would be
approximately 900 billion (in present value
terms)
35Transition Investment
36Impact on Minorities The Debate
- Despite the apparent benefits for all workers,
the impact of private accounts on minorities is a
hotly contested subject. - To hear analysis by a panel of legislators,
economists, and civil rights activists who met on
Capitol Hill on March 1, 2005 use the following
link - Panel Discussion The Impact of Social Security
Reform for African Americans
37The Benefits of Personal Accounts for Minorities
- Transformation from a defined-benefit to a
defined-contribution plan would disconnect total
benefits from life expectancy. - Under the current system, retirees who work all
their life but die before retirement receive no
benefits after paying into the system throughout
their career. - Minorities have shorter average life
expectancies, so the change would eliminate
current inequality. - Overall, personal accounts have a fairer rate of
return without bias in favor of citizens who live
longer.
38Effects of Life Expectancy
- Even if black men only live two years less than
white men, that is still 24 less Social Security
checks received. - Due to differences in life expectancies and
marriage rates, through Social Security there is
a net income difference of 10,000 per person
from blacks to whites (study by the RAND Corp.) - Social Security taxes crowd out other forms of
savings and investment. Because more minorities
live paycheck to paycheck, they are unable to
accumulate assets and build wealth. - One in three black men will pay into the system
but die before ever collecting benefits (Cato
Institute).
39Wealth Accumulation and Private Accounts
- Under new system, individuals have property
rights to their accumulated income. - These rights can be given to heirs if earning
citizen dies before exhausting their account - Inheritance right is hugely important based on
minorities shorter life expectancies. - Accounts give low income workers, who are largely
minorities, the chance to accumulate capital and
begin to bridge the black-white wealth gap.
40Personal Accounts and Poverty
- Not only would privatized system provide fairer
- benefits to minorities, but the rate of return
- would be far higher.
- Private accounts have the power to lift African
- American seniors out of poverty
- According to a Harvard Study, privatization would
reduce poverty among married African - American retirees by 23.4 and among widowed,
divorced or never married African Americans by
61.5. (Feldstein and Liebman, 2000)
41Current Poverty Rates for African American Seniors
42Minority Support for Personal Accounts
- 53.5 of blacks support privatization (Zogby
survey, 2001). - 54 of Hispanics and 51 of black voters support
the private individual accounts in Bushs Social
Security investment proposal (Washington Times
survey, December 2004).
43Problems with Reform Model 2
- Projected benefits in 2050 will be reduced to 88
of current benefits due to Model 2 transition
from wage-indexed formula (including annuitized
personal accounts) - Means lower total benefits to be provided, of
which minorities benefits disproportionately more
from and thus lose more. - Projected near poverty rates of minorities would
be higher under the Model 2 than current system,
even in the most optimistic personal account
scenarios - Under pessimistic PA return scenarios, black near
poverty rates would be even higher than under a
uniform downward adjustment of benefits to
achieve long term solvency (75 years). -Urban
Institutes model, DYNASIM3 simulation
44Problems with Investment Risk
- Investment experience and access to information
Minorities tend to have lower amounts of
investment experience and less access to good
financial advice, leading to lower returns on
their personal accounts than whites. - -1993 Merrill Lynch Household Survey
(confirmed blacks score lower on tests of
financial knowledge than whites.) - Risk Aversion Minorities tend to be more risk
averse. - Minorities depend on social security for larger
percentage of retirement income - 76 of Hispanics over 65 receive at least 50 of
income from Social Security, as do 88 of blacks. - Minorities may select low-risk funds with lower
returns
45Greater Investment Risk for Minorities
- Minorities are less able to bear investment
risks, and thus may have to opt for the standard
plan rather than the voluntary personal accounts.
- If these personal accounts function as planned,
whites will disproportionately benefit from
personal accounts while minorities will either
not use the voluntary personal accounts or be
forced to accept more stable investments with
lower returns in the face of risking their
retirement income.
46Loss of Safety Net
- With privatization of Social Security, government
guaranteed minimum benefits do not provide a
safety net against poverty in old age. - African American and Hispanic citizens are more
frequently reliant on Social Security to avoid
poverty so they are more likely to suffer in the
absence of the safety net.
47Hispanics Kept Out of Poverty by Social Security
48Blacks Kept Out of Poverty by Social Security
49Inheritance Right Less Helpful to Minorities
- Inheritance rights are ineffective for helping
minorities accumulate capital if all savings are
consumed during workers retirement. - Minorities depend on Social Security for
subsistence more often than whites so it can be
assumed more whites will take advantage of the
inheritance right.
50Social Security Benefits as a Share of Income
51Negative Implications of Lost Progressivity
- Patterns of discrimination leading to
differential affects on blacks in education and
labor cause blacks to benefits more from the
progressive benefit formula in the current system
than whites. - Blacks are more likely to experience lower wages
- blacks are less likely to have accumulated as
much income as whites in personal accounts, which
and would gain lower benefits than whites. - Blacks are more likely to experience periods of
little to no employment. - The progressive benefit formula of the current
system takes these issues into account by
considering years out of workforce, differences
in earning levels, and uses the 35 years of
highest earnings.
52African Americans Lower Earnings
53Negative Impacts on Survivor Benefits
- Blacks are more likely to die early, leaving
children to depend on survivor benefits. - Transition to Model 2 creates new problems with
middle aged worker deaths and their dependents.
Because they are less likely to have acquired
enough in their personal accounts to offset the
direct cuts in benefits, their children are left
with vast decreases in financial support. - This comes as a tradeoff with the benefit of
allowing workers who die close to retirement age
leaving behind an inheritance to their older
children who are better able to fend for
themselves financially.
54Failure to Address Disability Benefits
- The government has not addressed the issue of
disability benefits under the new plan. - Black citizens depend more on disability
benefits, so the reduction or elimination of the
program will disproportionately impact them.
55Insurance Problems Under Model 2
- Blacks are more likely to experience disability
and early death. - Losses in disability and life coverage may cause
blacks to need to purchase additional insurance
to make up for the loss in benefits. - The disproportionate need for disability and
survivor coverage leaves a larger burden on
blacks to recover this coverage outside of social
security, which they are less likely to be able
to afford.
56Flawed Life Expectancy Estimate
- -life expectancy estimates that include infant
and child mortality rates overestimate the
benefit discrepancy by race. - -After the age of 65, the average life expectancy
of African Americans is only 1.8 years shorter
than that of whites. (AARP fact sheet).
57Conclusions
- Shift from progressive hurts minorities because
it fails to take low income and unemployment into
account. - Risk aversion, lower income and less information
discourage minority investment in Social Security
personal accounts, making the primary
beneficiaries of Reform Model 2 wealthy,
educated, white citizens. - -Social Security was intended to be a safety net
against poverty in old age. Private accounts
eliminates insurance function places low income
beneficiaries at risk of losing investments. - -Gains based on lower life expectancy and the
ability to bequeath benefits do NOT cancel out
losses to minorities caused by reduced benefits,
loss of disability and survivor benefits.
58Conclusions Continued
- In sum, racial inequities will persist and may
even worsen if Reform Model 2 is adopted. - Reform Model 2 is scheduled for Senate hearings
despite these drawbacks for minorities, private
accounts and Social Security reform could soon
become a reality for American retirees.
59Sources
- Beedon, Laurel and Ke Bin Wu. Social Security
and Hispanics Some Facts. AARP Public Policy
Institute. September, 2003. - Changing Social Security the Impact on African
Americans. Panel discussion on Capitol Hill.
March 1, 2005. Available from http//www.jointcen
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Security? Joint Center Focus Magazine.
September 1998, Volume 26, No. 8. - Cooper, Mary H. How should Americas Retirement
System be Saved? Social Security Reform. The
CQ Researcher Online, 14, 781-804. Available
from http//library.cqpress.com. - Feldstein, Martin and Jeffrey Liebman. The
Distributional Effects of an Investment-Based
Social Security System, National Bureau of
Economic Research Working Paper no. 7492.
September 2000.
60Sources Continued
- Gist, John. Social Security Reform How do
Minorities Fare Under Social Security? AARP
Public Policy Institute. September 1998.
Backgrounder 1613, November 19, 2002. - Lambro, Donald. Minorities support Bushs plan,
polls find. The Washington Times. 31 January,
2005. - Hendley, Alexa A. and Natasha F. Bilimoria.
Minorities and Social Security An Analysis of
Racial and Ethnic Differences in the Curent
Program. Social Security Bulletin. Volume 62,
No. 2. 1999. - John, David C. Answering the Top 10 Myths About
Social Security Reform. Heritage Foundation. - Moore, Kathryn L. Redistribution Under the
Current Social Security System. The University
of Pittsburgh Law Review. Summer, 2000.
61Sources ctd.
- More Social Security and African Americans.
Heritage Foundation. 4 February, 2005. - Murdock, Deroy. Sober Security Personal
Retirement Accounts are Pro-Black, Too. The
National Review. May 14, 2002. - President's Commission to Stregthen Social
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Creating Personal Wealth for All Americans.
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