Commentary

African-American Support for Social Security Grows

This article originally appeared in the Baltimore Times on October 7, 2002.
Jesse Jackson once famously commented that capitalism without the capital is just another ”ism.” True enough. Which makes it all the more frustrating that so many old school African-American leaders, like Jackson, oppose efforts to create personal savings accounts within the Social Security system. Their solution to the lack of capital in black communities is to redistribute it from other communities. Such an approach not only is doomed to failure, it increases racial tensions in America while ignoring the root cause of the problem.

The legitimate concern of many regarding the wealth gap between blacks and whites in America has too often focused on the causes of poverty. But poverty is the natural state of man. The more interesting approach is to inquire into the creation of wealth. And here the evidence is unambiguous.

Savings and investment are the surest means of accumulating wealth. The problem for many African-Americans is that low incomes don’t leave much opportunity to save. Some black leaders, such as Star Parker of the Coalition for Urban Renewal and Education (CURE), believe that even as incomes of African-Americans begin to approach parity with the rest of the nation, there still exists a culture of spending rather than saving in the black community.

Whatever the cause, the lack of accumulated wealth among African-Americans is cause for concern. According to new Census Bureau figures, in theperiod from 1967 through 1997 household incomes in black families grew 72 percent faster than white household incomes - albeit from a lower base -approaching 80 percent of white incomes. Yet the median African-American family held only $3,060 in financial assets in 1998. That is less than one-tenth the financial assets held by the median white family.

Which is where Social Security privatization comes in. If allowed to invest their payroll taxes in real assets, a couple earning the minimum wage their entire working lives would accumulate assets in their accounts totaling more than $250,000 in current dollars. And that is using interest assumptions well below the historic rate of return on equities. It was Albert Einstein who said that compound interest is the strongest force in the universe. He wasn’t kidding.

It is important to note, as well, that Social Security privatization need not mean investing in stock mutual funds. Although stocks provide the best return over the long haul, some people simply are not comfortable with investments that can decline in value over the short term. For them the options of money market funds, bond funds, mixed funds, or even insurance products can provide a much higher level of retirement income than Social Security only promises, but probably will not be able to meet, due to its huge unfunded liability.

And the really exciting thing about private Social Security accounts from the standpoint of African-Americans is that they will have a legal right to assets they own and no politician may take from them. Under the current pay-as-you-go system of Social Security the Supreme Court has ruled (Fleming v. Nestor, 1960) that no one has a right to the money they pay into the system. What you get back is entirely up to 535 politicians in Congress.

And, indeed, Congress has changed the rules many times, increasing the payroll tax and pushing back the retirement age. One has to ask, where is the dignity in such a system?

Under a privatized system of personal accounts, Americans would be able to leave their accumulated funds to their loved ones. Now, the system callously doesn’t provide for that. If your children are grown when you pass away, the money simply disappears. This is particularly unfair to African-Americans, who have a greater need for intergenerational wealth transfer and who have a shorter life expectancy than other Americans. As Gwendolyn King, an African-American member of the President’s Commission to Strengthen Social Security, puts it, ”the key to a more prosperous African-American community lies in making it possible to build wealth that can be passed from generation to generation.”

A new generation of black leadership is increasingly interested in ending African-American dependence on the failed pay-as-you-go Social Security system. Ohio Secretary of State Ken Blackwell, speaking at a Cato Institute conference on African-Americans and Social Security was straightforward: ”Transforming the system to one based on individually owned, privately invested accounts would treat African-Americans far more fairly.” He went on to make the valid point that this is not a partisan issue, but that it clearly is a civil rights issue.

African-Americans earn the money they pay into the Social Security system.

It is an outrage that they are not allowed to accumulate wealth by purchasing real assets with that money. The current system means continued dependence on politicians. A privatized system means independence and a higher standard of living. Perhaps that is why, in a recent Zogby Poll, two-thirds of African-Americans surveyed said they favor private Social Security accounts.

Edward H. Crane is president and CEO of the Cato Institute.