The Impact of Social Security Reform on Low‐​Income Workers

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Because the poor are disproportionatelydependent on Social Security for their retirementincome, they will be among those mostaffected by any reform of the troubled retirementprogram. Traditional reforms, such asraising taxes or cutting benefits, will leave low‐​incomeworkers worse off. However, allowingworkers to save and invest a portion of theirSocial Security taxes in individual accountsmay avoid or offset potential benefit cuts, withoutincreasing taxes.

Equally important, individual accounts mayprovide an opportunity to address some of theother problems with the current Social Securitysystem, in particular its impact on wealth accumulation,the intergenerational transfer ofwealth, and the inequality of wealth in America.

Poor households currently save very littleand therefore own almost no financial wealth atretirement. As a result, the distribution ofbequeathable wealth among retirees in theUnited States is highly unequal. There is strongevidence that Social Security may be contributingto that inequality. In contrast, a system ofindividual accounts would allow workers toaccumulate real and bequeathable wealth, leadingultimately to greater overall equality ofwealth. Social Security privatization thereforebecomes the truly progressive option forreform.

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Jagadeesh Gokhale

Jagadeesh Gokhale is a senior economic adviser with the Federal Reserve Bank of Cleveland. The opinions expressed herein are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Cleveland or of the Federal Reserve System.