The coming debate over Social Security reform is vital to all Americans, butperhaps no group has as much at stake as African-Americans.
To start with, African-American seniors are disproportionately dependent onSocial Security for their retirement income. Three in four olderAfrican-American households rely on Social Security for half or more oftheir retirement income. A third of older African-Americans rely on SocialSecurity for all of their income.
Yet Social Security is facing a financial crisis. Within 15 years, theprogram will begin running a deficit, spending more on benefits than ittakes in through taxes. The Social Security Trust Fund, which is supposed tocontinue paying benefits until 2037, is really little more than a collectionof IOU's. Without an enormous tax increase, Social Security will not be ableto pay all the benefits that have been promised. That would be devastatingfor African-American seniors.
At the same time, African-Americans face distinct problems and disadvantagesunder the current system. For example, lifetime Social Security benefits areclosely related to life expectancy. The longer you live, the more money youget from Social Security. But African Americans have shorter life spans thanwhites. As a result, a black man or woman earning exactly the same lifetimewages, and paying exactly the same lifetime Social Security taxes as his orher white counterpart, will likely receive a far lower rate-of-return. Astudy by the nonpartisan RAND Corporation found that the rate-of-return forAfrican-Americans was approximately one percent lower than that for whites.The result was a net lifetime transfer of wealth from blacks to whitesaveraging nearly $10,000 per person.
This lower rate-of-return is not just an abstract number, but translatesdirectly into lower benefits. For example, assume that a 30-year-old blackand white man each earn $30,000 per year over their working lifetimes. Bythe time they retire, they will both have paid $136,740 in Social Securitytaxes 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 willreceive $189,389 in total Social Security benefits. The black man, incontrast, 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 thanfor whites because African-Americans are far less likely to have other formsof 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 halfof black families have no significant financial assets at all. There aremany reasons for this savings gap, but Social Security is a contributingfactor.
After paying their living expenses, few low-income workers have money leftover to invest. Yet they must pay 12.4 percent of their income into SocialSecurity. Those Social Security taxes squeeze out other forms of saving andinvestment. As a result, many African-Americans are unable to accumulatereal 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 circumstancesof African-Americans. Such frequently discussed reforms as raising theretirement age, reducing benefits and increasing taxes would only makethings worse. On the other hand, privatizing Social Security--transformingthe system into one based on individually owned, privately investedaccounts--would treat African-Americans far more fairly.
Privatizing Social Security would disconnect total benefits from lifeexpectancy. The benefits an individual receives would depend on what waspaid into the system plus the investment return on those payments, not onhow many years the person receives benefits. Moreover, individuals wouldhave a property right to their Social Security benefits. If a person were todie with money still in his or her retirement account, that money wouldbecome part of an estate, to be inherited by that person's heirs.
There are more immediate advantages as well. Not only would a privatizedSocial Security system provided a fairer rate of return toAfrican-Americans, but that rate-of-return would be far higher, lifting manymore African-American seniors out of poverty.
Given the unfairness of the current Social Security system, it is time forAfrican-Americans to raise their voices and demand a change. And if GeorgeW. 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.