The Implications of Social Security Reform for Minorities - PowerPoint PPT Presentation

1 / 61
About This Presentation
Title:

The Implications of Social Security Reform for Minorities

Description:

The Implications of Social Security Reform for Minorities ... The overall implications of the current Social Security system for minorities are unclear. ... – PowerPoint PPT presentation

Number of Views:141
Avg rating:3.0/5.0
Slides: 62
Provided by: libr225
Category:

less

Transcript and Presenter's Notes

Title: The Implications of Social Security Reform for Minorities


1
  • The Implications of Social Security Reform for
    Minorities

2
SOCIAL 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
4
Reasons 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.

5
Benefits as a Proportion of Income
6
Higher 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.

8
Minority 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

9
Years 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.

10
Benefits 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

11
Life 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.

12
Drawbacks 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.

13
Effects 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.

14
Disability 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.

15
Wrap-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.

16
The 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

17
Structure 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

18
Structure 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

19
The 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

20
Tier 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

21
Tier 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

22
Limitations 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

23
Access 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

24
Retirement 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

25
Protection 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

26
Reform 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

27
Key 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.

28
Key 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.

29
Benefits
  • 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

30
Increased Benefits Under Model 2
31
Fiscal 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

32
Improvements Compared to Current Law
33
Reduction 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

34
Transition 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)

35
Transition Investment
36
Impact 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

37
The 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.

38
Effects 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).

39
Wealth 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.

40
Personal 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)

41
Current Poverty Rates for African American Seniors
42
Minority 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).

43
Problems 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

44
Problems 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

45
Greater 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.

46
Loss 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.

47
Hispanics Kept Out of Poverty by Social Security
48
Blacks Kept Out of Poverty by Social Security
49
Inheritance 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.

50
Social Security Benefits as a Share of Income
51
Negative 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.

52
African Americans Lower Earnings
53
Negative 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.

54
Failure 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.

55
Insurance 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.

56
Flawed 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).

57
Conclusions
  • 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.

58
Conclusions 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.

59
Sources
  • 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
    ter.org.
  • Conrad, Cecilia. Should We Privatize Social
    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.

60
Sources 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.

61
Sources 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
    Security.  Strengthening Social Security and
    Creating Personal Wealth for All Americans. 
    Washington, D.C. December 2001
  • Tanner, Michael. Disparate Impact Social
    Security and African Americans. Cato Institute
    Briefing Papers. 1998.
Write a Comment
User Comments (0)
About PowerShow.com