Commentary

The African American Stake in Social Security Reform

The coming debate over Social Security reform is vital to all Americans, but perhaps no group has as much at stake as African-Americans.

To start with, African-American seniors are disproportionately dependent on Social Security for their retirement income. Three in four older African-American households rely on Social Security for half or more of their retirement income. A third of older African-Americans rely on Social Security for all of their income.

Yet Social Security is facing a financial crisis. Within 15 years, the program will begin running a deficit, spending more on benefits than it takes in through taxes. The Social Security Trust Fund, which is supposed to continue paying benefits until 2037, is really little more than a collection of IOU’s. Without an enormous tax increase, Social Security will not be able to pay all the benefits that have been promised. That would be devastating for African-American seniors.

At the same time, African-Americans face distinct problems and disadvantages under the current system. For example, lifetime Social Security benefits are closely related to life expectancy. The longer you live, the more money you get from Social Security. But African Americans have shorter life spans than whites. As a result, a black man or woman earning exactly the same lifetime wages, and paying exactly the same lifetime Social Security taxes as his or her white counterpart, will likely receive a far lower rate-of-return. A study by the nonpartisan RAND Corporation found that the rate-of-return for African-Americans was approximately one percent lower than that for whites. The result was a net lifetime transfer of wealth from blacks to whites averaging nearly $10,000 per person.

This lower rate-of-return is not just an abstract number, but translates directly into lower benefits. For example, assume that a 30-year-old black and white man each earn $30,000 per year over their working lifetimes. By the time they retire, they will both have paid $136,740 in Social Security taxes and will be entitled to monthly Social Security benefits of $1,162. However, the white man can expect to live until age 81. If he does, he will receive $189,389 in total Social Security benefits. The black man, in contrast, can expect to live only to age 79. He will receive only $161,750, almost $27,000 less than his white counterpart.

The problems of Social Security are also worse for African-Americans than for whites because African-Americans are far less likely to have other forms of savings or wealth. The typical black household has a net worth of only $4,500. That’s less than one-tenth of the figure for whites. More than half of black families have no significant financial assets at all. There are many reasons for this savings gap, but Social Security is a contributing factor.

After paying their living expenses, few low-income workers have money left over to invest. Yet they must pay 12.4 percent of their income into Social Security. Those Social Security taxes squeeze out other forms of saving and investment. As a result, many African-Americans are unable to accumulate real wealth. Moreover, since Social Security benefits are not inheritable, this wealth inequity is compounded from generation to generation.

Social Security reform should take into account the needs and circumstances of African-Americans. Such frequently discussed reforms as raising the retirement age, reducing benefits and increasing taxes would only make things worse. On the other hand, privatizing Social Security—transforming the system into one based on individually owned, privately invested accounts—would treat African-Americans far more fairly.

Privatizing Social Security would disconnect total benefits from life expectancy. The benefits an individual receives would depend on what was paid into the system plus the investment return on those payments, not on how many years the person receives benefits. Moreover, individuals would have a property right to their Social Security benefits. If a person were to die with money still in his or her retirement account, that money would become part of an estate, to be inherited by that person’s heirs.

There are more immediate advantages as well. Not only would a privatized Social Security system provided a fairer rate of return to African-Americans, but that rate-of-return would be far higher, lifting many more African-American seniors out of poverty.

Given the unfairness of the current Social Security system, it is time for African-Americans to raise their voices and demand a change. And if George W. Bush is serious about reaching out to the African-American community, Social Security would be a good place to start.

The stakes are high. But so are the opportunities.

Michael Tanner is director of the Project on Social Security Privatization at the Cato Institute.