In making these changes, however, it is particularly important that we consider their impact on the most vulnerable Americans who disproportionately depend on Social Security. For example, the poorest 20 percent of Americans receive nearly all of their retirement income from Social Security, while the wealthiest fifth of Americans receive less than 20 percent of their retirement income from the system. It is also important to understand that it is not just reform that will affect these vulnerable Americans, but so to will a failure to reform the system. Since Social Security currently cannot pay promised benefits, those benefits will eventually have to be reduced by roughly 26 percent, a reduction that will fall heaviest on those who can least afford it.
On the other hand, reform, properly structured, can not only protect the poor and vulnerable from these otherwise inevitable benefit cuts, but can actually produce an improved Social Security system that will leave them better off. We can give low income workers a chance to build real inheritable wealth. We can give them an ownership stake in the American economy. And, while maintaining a safety net, we can give them a chance to earn a higher rate of return, leading to higher retirement benefits that would lift millions of seniors out of poverty.
Social Security has elements of both an insurance and a welfare program. It is, in effect, both a retirement and an anti‐poverty program. However, in attempting to combine these two functions, it has ended up doing neither particularly well. While much time has been spent discussing Social Security’s shortcomings as a retirement program, far less attention has been paid to its inadequacies as an anti‐poverty program.
There is no question that the poverty rate among the elderly has declined dramatically in the last half century. As recently as 1959, the poverty rate for seniors was 35.2 percent, more than double the 17 percent poverty rate for the general adult population. Today, it has declined to approximately around 10 percent.
Clearly Social Security has had a significant impact on this trend. Studies suggest that in the absence of Social Security benefits more than half of seniors would have income below the poverty level. This suggests that receipt of Social Security benefits lifted millions of seniors out of poverty. Moreover, the percentage of elderly in poverty after receiving Social Security benefits has been steadily declining in recent years, indicating the increased importance of Social Security as an anti‐poverty remedy.
However, there is a superficiality to this line of analysis. It assumes that any loss of Social Security benefits would not be offset through other sources of income. In other words, it simply takes a retiree’s current income and subtracts Social Security benefits to discover, no surprise, that the total income is now lower and, indeed, frequently low enough to throw the retiree into poverty.
That much should be obvious. Social Security benefits are a substantial component of most retirees’ income. It constitutes more than 90 percent of retirement income for one‐quarter of the elderly. Nearly half of retirees receive at least half of their income from Social Security. The question, therefore, is not whether the sudden elimination of Social Security income would leave retirees worse off–clearly it would–but whether in the absence of Social Security (or an alternative mandatory savings program) retirees would have changed their behavior to provide other sources of income for their own retirement.
However, even taking the idea of Social Security as an anti‐poverty tool on its own terms, the evidence suggests that the current Social Security is inadequate . After all, despite receiving Social Security benefits, roughly one out of ten seniors still lives in poverty. In fact, the poverty rate among seniors remains slightly higher than that for the adult population as a whole. And, among some subgroups the problem is far worse. For the poverty rate is over 20 percent among elderly women who are never married or widowed and roughly 30 percent among divorced or separated women. African‐American seniors are also disproportionately left in poverty. Nearly a third of African‐Americans over the age of 65 have incomes below the poverty level.
In addition, lifetime Social Security benefits depend, in part, on longevity. As a result, people with identical earnings histories will receive different levels of benefits depending on how long they live. Individuals who live to be 100 receive far more in benefits than individuals who die at 66. Therefore, those groups in our society with shorter life expectancies, such as the poor and African‐Americans, are put at a severe disadvantage.
Of course, Social Security does have a progressive benefit formula, whereby low‐income individuals receive proportionately higher benefits per dollar paid into the system than do high‐income workers. The question, therefore is to what degree shorter life expectancies offset this progressivity.
Using income as the sole criteria, the literature is mixed. Some studies, such as those by Eugene Steuerle and Jan Bakja of the Urban Institute and Dean Leimer of the Social Security Administration conclude that shorter life expectancies diminish but do not completely offset Social Security’s progressivity. However, there is a growing body of literature, including studies by Daniel Garrett of Stanford University, the RAND corporation, Jeffrey Liebman, and others that show the progressive benefit formula is completely offset, resulting in redistribution from poor people to wealthy.
The question of Social Security’s unfairness to ethnic minorities appears more straightforward, particularly in the case of African‐Americans. At all income levels and all ages, African‐Americans have shorter life expectancies than do 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 far less in lifetime Social Security benefits.
This disparity has a significant impact on the concentration of wealth in our society. Social Security benefits are not inheritable. A worker can pay Social Security taxes for 30 or 40 years, but if that worker dies without children under the age of 18 or a spouse over the age of 65, none of the money paid into the system is passed on to his heirs. As Cato Senior Fellow Jagadedesh Gokhale, has noted, Social Security essentially forces low‐income workers to annuitize their wealth, preventing them from making a bequest of that wealth to their heirs.
Moreover, because this forced annuitization applies to a larger portion of the wealth of low income workers than high income workers, it turns inheritance into a “disequalizing force,” leading to greater inequality of wealth in America. The wealthy are able to bequeath their wealth to their heirs, while the poor cannot. Indeed, Gokhale and Boston University economist Laurence Kotlikoff estimate that Social Security doubles the share of wealth owned by the richest one percent of Americans.
Martin Feldstein of Harvard University reaches a similar conclusion. Feldstein suggests that low‐income workers substitute “Social Security wealth” in the form of promised future Social Security benefits for other forms of savings. As a result, a greater proportion of a high‐income worker’s wealth is in fungible assets. Since fungible wealth is inheritable, while Social Security wealth is not, this has led to a stable concentration of fungible wealth among a small proportion of the population. Feldstein’s work suggests that the concentration of wealth in the United States would be reduced by as much as half if low‐income workers were able to substitute real wealth for Social Security wealth.
Properly constructed, a Social Security reform plan including personal accounts can solve these problems. HR 530, introduced by your colleague Mr. Johnson, provides an excellent example of how this would work. Mr. Johnson’s bill would allow younger workers to save and invest their half of the Social Security payroll tax (6.2 percent of wages) through personal accounts. Because workers would own the money in their accounts‐which they do not under the current system‐that money would be fully inheritable. If they die before retirement prematurely, they would be able to pass all the money in their account on to their loved ones; death after retirement would still leave substantial unused portions for their heirs.
And, it is not just future generations who would benefit from this ownership. Personal accounts would give low‐income workers a chance to build a nest egg of real wealth for the first time in their lives, giving them a real and personal stake in the economy. As Michael Sherraden of Washington University in St. Louis has shown, ownership can have significant beneficial impact on a variety of social pathologies, not only increasing work effort and the propensity to save, but even reducing crime, drug abuse, school drop out rates, and illegitimacy. Giving people an ownership stake in America‐something that HR 530, with its recognition bonds does even more than other personal account plans‐could be considered one of the most important anti‐poverty proposals we could undertake.
Finally, HR 530 would also establish an enhanced safety net to protect the most vulnerable. It leaves current survivor and disability benefits unchanged. However, it also includes a new minimum Social Security benefit equal to 100 percent of the poverty level, a significant increase over today. Thus, under Mr. Johnson’s bill, no eligible senior would ever again retire into poverty.
Other personal account plans, including Mr. Ryan’s and to a lesser extent Mr. Shaw’s, would also represent a significant boost for low income and otherwise vulnerable Americans.
In summation, Social Security reform is inevitable. If we simply fall back on the old ways of raising taxes and cutting benefits, we will significantly harm those most at need. If we do nothing, we end up with a benefit reduction that the poor and vulnerable can ill afford. However, by making personal accounts part of any Social Security reform, we can give low‐income workers a chance to build a nest egg of real inheritable wealth. In combination with an enhanced safety net, we can provide vulnerable workers with a new and better Social Security system.