www.epinet.org/content.cfm/issuebriefs_ib161
Adobe Acrobat / PDF You're in good hands with Social Security But privatization proposals would unravel its ability to insure against l oss of income, disability, and death by Christian E Weller and Michelle Bragg President Bush's Commission to Strengthen Social Security, having apparen tly discovered that it can't rely on sound economics to defend partial p rivatization, has instead chosen to falsely discredit the existing progr am by suggesting it is a bad deal for African Americans and women.
a ilure to restructure Social Security poses a disproportionate threat to the overall retirement security of women," the commission stated in its July report, adding, "African Americans are disproportionately threatene d by the financing shortfalls facing the current system." But the commis sion's tactic is transparently belied by facts: for the past 66 years, S ocial Security has offered a safety net for workers and their families i n the event the primary source of family income is lost due to retiremen t, disability, or death. In these situations, women, children, low-wage workers, and African Americans benefit greatly from Social Security. Social Security is a three-pronged insurance program: it insures against loss of income due to retirement, death, or disability. About two-thirds of Social Security's expenditures pay for retirement benefits. The aver age elderly household receives 58% of its income from Social Security, a nd without these benefits an additional 39% of the elderly would fall in to poverty. Moreover, Social Security's retirement benefit program offer s insurance both against low lifetime earnings, since lower lifetime ear ners receive relatively higher benefits than do higher lifetime earners, and against old-age poverty, since it pays guaranteed, inflation-proof benefits regardless of life expectancy. Low-wage workers and women (who tend to live longer than men and have lower lifetime earnings than men) benefit especially from these retirement insurance features. Social Security is also a large disability and life insurance program -ab out a third of expenditures pay for survivorship and disability benefits -and African Americans, women, and children are the major beneficiaries. While African Americans make up just 12% of the population, they consti tute 18% of disability beneficiaries; These insurance features make Social Security a good deal for the average worker in general and for low-wage workers and women in particular. The average rate of return from Social Security for workers born between 19 56 and 1964 is 27%, substantially higher than the 2% that could be expe cted from a privatized system. Partial privatization will likely result in cuts to all benefits Social Security privatization would be a bad deal for women, children, Af rican Americans, and low-wage workers, since it would significantly weak en Social Security's insurance function. Diverting a portion of Social S ecurity revenue into individual accounts will result in less income for Social Security itself, meaning that retirement, disability, and survivo rship benefits will have to be cut. Indeed, past proposals for partial privatization generally included cuts in all three types of benefits. Aaron and Reischauer (1998) estimated that the loss of income to Social Security would require a 20% across-the-board cut in retirement, disability, and survivorship benefits. To cover the income shortfall, retirement and disability benefits were to be cut substantially, by about 30% to 40% for high- and moderate-income workers (Aaron and Reischauer 2001). Individual account savings will not compensate for benefit cuts The cuts to Social Security could be offset to some degree by savings in individual accounts. But these accumulated savings will on average cover only one-third to one-half of the loss in benefits (Aaron et al. The share of lost benefits a worker will be able to recover with the accu mulated savings depends on several factors, the most important of which is the rate of return. Future real rates of return, though, are likely t o be lower than in the past. Real rates of return on stock markets depen d on economic growth, and Social Security's trustees assume that economi c growth over the next 75 years will equal only half that of the past 75 years, 16% compared to 3%. Hence, real rates of return should be equal ly lower, meaning that we can expect an average rate of return of 36% f or the next 75 years (Baker 1997). Another factor cutting into rates of return on private accounts will be t he administrative charges on individual accounts and premiums for privat e insurance to pay for survivorship and disability benefits. In addition , Social Security will be expected to honor promises made to workers who already paid into the system, therefore requiring current workers to pa y twice, once into their own accounts and once for the benefits already promised. Consequently, the effective rate of return from stock market i nvestments will be around 2% (Baker 1998), applicable to every worker re gardless of demographic or economic background. Moreover, even if rates of return for the next 75 years equal those of th e past 75, some workers will, on average, be more likely to experience a substantial loss in benefits than others. For instance, low-wage worker s and workers with long average life expectancies will have an even hard er time than their higher-earning but shorter-lived counterparts in reco vering their loss in retirement benefits through savings in individual a ccounts (Aaron et al. Currently, Social Security redistributes funds toward low-wage earners, y ielding them a higher rate of return on their contributions. While the a verage worker born between 1956 and 1964 can expect a rate of return of 27%, men with low earnings can expect a 47% real rate of return and wo men can expect a 68% return (Cohen, Steuerle, and Carasso 2001). Also, as Social Security pays benefits based on lifetime earnings without adju stments for life expectancies, workers who can expect to live longer, pa rticularly women, receive higher lifetime benefits than others. Women bo rn between 1956 and 1964 can expect a real rate of return of 37%, compa red to 17% for men (Cohen, Steuerle, and Carasso 2001). With individual accounts workers will be on their own, though. It will be harder for lower-wage workers and for workers with longer life expectan cies to recover across-the-board benefit cuts with savings in individual accounts. Assuming different rates of return on individual accou nts, Baker (2000) estimates that a married average-wage worker could rec over 28%, and a married low-wage worker 20%, of lost benefits. The calculations for average-wage workers mask differences between demogr aphic groups. Two factors are of particular importance-life expectancy a nd earnings. Women, for instance, have a higher rate of return under Soc ial Security than do men because they live longer, thus getting more out of Social Security's guaranteed, inflation proof, lifetime benefit, and they earn less, thus taking advantage of the more-generous benefits to lower lifetime earners. In other words, in order to receive the same ben efits as under Social Security, women would have to have accumulated mor e relative to their earnings than men to compensate for the fact that th ey tend to live longer and earn less over their lifetimes. Moreover, survivorship and disability beneficiaries are likely to recover less in terms of lost benefits than others. If a worker becomes disable d before reaching retirement age, disability benefits are converted to r etirement benefits when the disabled worker reaches retirement age. Unde r a privatized system, workers with a complete working life would have a chance to build up savings to compensate partly for the loss in Social Security retirement benefits. But disabled workers have to rely on the a ccumulated savings from much shorter working lives. Consequently, disabi lity beneficiaries would experience an above-average benefit cut. Similarly, if a worker dies, Social Security operates like life insurance and provides benefits to surviving spouses and chi...
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