News Release

December 6, 2001

Social Security a bad deal for low-income, minority workers
Private accounts would help alleviate wealth disparities, according to new study

WASHINGTON—The president's Social Security reform commission will release its final report by Dec. 11 and is expected to include recommendations to create personal retirement savings accounts. Critics of such a plan argue in favor of the status quo and say that individual account reforms would hurt low-income Americans.

But in the new Cato Institute study, "The Impact of Social Security Reform on Low-Income Workers," Federal Reserve Bank economist Jagadeesh Gokhale shows that the lack of property and inheritance rights in the current program actually harms poor and minority workers and helps maintain wealth disparities.

"As a result, the distribution of bequeathable wealth among retirees in the United States is highly unequal," he writes. "In contrast, a system of individual accounts would allow workers to accumulate real and bequeathable wealth and would lead ultimately to greater equality of wealth. Social Security privatization therefore becomes the truly progressive option for reform—one that is most likely to benefit the poor."

Many modest households—particularly minority households and those with low education and earnings—currently save very little and therefore own almost no financial wealth at retirement, Gokhale explains.

"The poor are disproportionately dependent on Social Security," writes Gokhale. "The poorest 20 percent of the elderly, for example, depend on Social Security for 81 percent of their retirement income, while Social Security provides only 20 percent of retirement income for the wealthiest fifth of retirees."

Nevertheless, according to Gokhale, Social Security's financial troubles are intractable and traditional reforms, such as raising taxes or cutting benefits, will leave low-income workers worse off. "Allowing workers to save and invest a portion of their Social Security taxes in individual accounts may avoid or offset potential benefit cuts, without increasing taxes," he says.

Social Security may also transmit this inequality across generations, Gokhale says. "Because it generates an asymmetric impact on retirement saving by low and high lifetime earners, Social Security may be reducing or eliminating the inheritances of children in poor households but not of those in rich households," he writes. "In turn, this may reinforce the chance that the children of the poor, in contrast to the rich, themselves arrive at retirement with low levels of bequeathable wealth."

"The Impact of Social Security Reform on Low-Income Workers"