News Release

February 5, 2001

African-Americans penalized by Social Security
Private retirement accounts could mitigate problems, study says

WASHINGTON—African-Americans are more dependent on Social Security for retirement income than whites, but because of their shorter life expectancies, they reap fewer benefits from the program, according to a new Cato Institute study.

Despite the progressive benefit structure of Social Security, 30 percent of African-American seniors still live in poverty, according to Michael Tanner, director of Cato's Project on Social Security Privatization, in "Disparate Impact: Social Security and African-Americans." Social Security also contributes to the wealth gap between blacks and whites, since high payroll taxes squeeze out the ability of low-income workers, many of them African-American, to save and invest.

African-Americans at all ages and incomes have lower life expectancies than whites. That means blacks will collect Social Security benefits for fewer years than whites, despite having paid into the system for the same number of years. And that, in turn, means blacks receive a significantly lower rate of return from Social Security. Tanner says returns for blacks are 0.5 percent to 1 percent lower than for whites, translating into a lifetime transfer of wealth from blacks to whites of nearly $10,000 per person.

As for wealth, the typical African-American household has a net worth of just $4,500, less than one-tenth the figure for whites. This wealth gap is exacerbated by a Social Security system that drains 12.4 percent from African-Americans' paychecks. "For low-income workers, the primary reason for lack of savings is not a lack of incentives but a lack of disposable income," Tanner says. "After paying daily living expenses, they simply have no funds left over to invest."

Tanner says the traditional solutions to Social Security's financial woes-tax increases, benefits cuts and increases in the retirement age-will only make the situation worse for African-Americans, who can ill afford to pay more for a smaller benefit that they may not live long enough to see. By contrast, he says, a system of private retirement accounts "would provide poor African-American retirees with higher benefits, would not be dependent on life expectancy, and would increase the pool of capital available for investment in poor inner-city neighborhoods."

"Everyone interested in racial equality should recognize that Social Security privatization is rapidly becoming a civil rights issue," Tanner says. "In its own way, privatizing Social Security will do as much for future generations of African-Americans as ending Jim Crow did for past generations."

"Disparate Impact: Social Security and African-Americans"