INCREASING SECURITY

December 1998
		How can we reform Social Security? Should the government invest Social Security into the stock market to obtain higher returns? Should individuals be able to invest their Social Security contributions in individual accounts? Experts answer your questions.

Would individual accounts have a safety net? What about women and minorities? What is SSI? Would CalPERS work on a national level? Should we eliminate Social Security?   More Social Security coverage. White House Conference on Social Security The Urban Institute. Preamble Center The CATO Institute. The Social Security Administration. Browse the NewsHour's Health Spotlight	Rebecca Swarthmore of New York, NY, asks : What are the pros and cons of individual accounts for women and minorities? Rudy Penner responds: For anyone, it depends very much on the nature of her or his career. A woman who spends long periods out of the labor force to raise children will not accumulate much of an individual account. She is likely to have to rely on the spousal benefit under Social Security and on any individual account accumulated by her husband. She would be economically vulnerable in the case of divorce, as is this type of woman today. In the case of widowhood, it would depend on how the traditional Social Security system is reformed in conjunction with individual accounts. There are proposals for improving widow's benefits in return for reducing the spousal benefit. A new minimum benefit, such as discussed above, would be a big help to many women, both married and divorced. A married career woman is treated badly by the current system. They pay payroll taxes all their working life to earn a benefit that often does not much exceed the spousal benefit that they would have enjoyed even if they had never worked and paid taxes. To the extent that the traditional system is pared back in favor of individual accounts, they are likely to benefit, presuming that the combination of their benefits exceeds today's spousal benefit. (There is a problem in comparing reform proposals with today's system, because today's system is not viable in the long run. Either benefits will have to be cut, taxes raised or deficits increased. Since reform is essential, it is probably best to compare any reform proposals with all its major competitors, but there is not space to do that here.) The issue is complicated for minorities as well. To the extent that they have lower than average income, the current system provides a higher pension relative to lifetime earnings. The substitution of private accounts for the traditional system might not raise total benefits for the average minority as much as for the average majority person. On the other hand, to the extent that minorities have lower than average expected life, they benefit from the relatively higher pension for a shorter period. Individual accounts can be left to one's heirs if one dies young and that could be an advantage, but other reforms of the system, such as a new minimum benefit could be much more important. Michael Tanner and Darcy Olsen respond: According to a study by researchers at Harvard University, virtually every woman-single, divorced, married, or widowed-would be better off financially under a system of fully private retirement accounts, the earnings of which could be shared by spouses. The researchers studied 1,992 actual women who retired in 1981, and compared their Social Security benefits to what they would have received from a personal account that returned 6.2 percent. Every women studied would have been as well off or better off with a personal account. Not one woman was worse off under the private system. On average, personal accounts would have provided the single women with 58 percent more than Social Security and wives with 208 percent more. Those higher returns are critical to women's well-being in retirement. Today, Social Security leaves 13.6 percent of women in poverty: the good news is that the research shows that it doesn't have to be that way. Minorities, and African-Americans in particular, would also benefit from a system of personal retirement accounts. Under the current system, how much you get from Social Security depends on how long you live. Life expectancies for African Americans are shorter than for whites. Therefore, they often receive far fewer retirement checks. For example, a white man who reaches age 65 can expect to live 15.7 years, while a black man can expect to live for only 13.6 more years. That means that the white man can expect to receive 24 more checks than the African-American man. An individual in a system of personal retirement accounts owns his retirement savings. If he dies prematurely, then he can leave this money to family members. Moreover, the greater benefits generated in a privatized system would be particularly important to the African-American community. Currently, 29.6 percent of all African Americans over age 65 have incomes below the poverty level. The greater monthly payments would have a substantial impact on the lives of these individuals. Take for example a 28-year-old earning $13,500 a year. He would get just $815 from Social Security but would receive $2,292 if he invested in a mixed fund that earned a 5.75 percent return (which is below the historical rate of return). Dean Baker responds: The answer to this question depends to a great extent on how individual accounts are set up. Individual accounts are likely to be very costly to administer. The current system has extremely low administrative costs. Last year they came to just over $2.0 billion approximately 0.7 percent of annual revenue. By contrast, the administrative costs in the privatized system in Chile have averaged about 15 percent of the money paid in each year. If the U.S. system had the same cost rate, administrative expenses would exceed $40 billion a year. This cost will be borne by all workers, but it is likely to harm lower income workers the most, who disproportionately are women and minorities. A worker who puts $200 a year into an account that charges annual fees of $50-60 is likely to get a negative return much of their working lives. Tight government regulation of fees, that requires financial institutions to make accounts available to low income workers at below cost, could reduce this problem, but it is not clear that the financial industry would ever accept this sort of regulation. The second big issue with individual accounts is whether workers will be required to purchase an annuity with their accumulated savings when they reach retirement. (An annuity is a guaranteed annual payment for the duration of a worker's life, like Social Security.) If annuities are not required, then many people with shorter life expectancies will not purchase them. This will make annuities more expensive for the people who do opt to purchase them. Since women, on average, live longer then men, they would be hurt by this. Many proponents of individual accounts have argued that African-Americans will gain from these accounts, because they have shorter life expectancies, and therefore don't live to collect much Social Security. Some of their research has been extremely sloppy, for example, the life-expectancy of African-Americans that reach age 65 is not much shorter than for whites who live to age 65, but it is nonetheless true that African-Americans don't live as long as whites. Still it is not clear how the proponents of individual accounts can help this situation. Virtually no one proposes allowing workers to just spend down all their money as soon as they hit retirement. If they were allowed to do this, what was the point of forcing them to save through their whole working life? This means that workers will still have to either buy annuities or gradually spend down their savings in a system of individual accounts. If the worker dies early, then they have not received much of the benefits of their savings. The one advantage that advocates of private accounts can point to is that the money remaining can be passed on to an heir or willed to a charity. Before anyone gets too excited about this, it is important to remember that the poorest African-Americans, the ones most likely to die young, often die in debt. In this case, the money will go to their creditors, not their heirs. This may make the finance companies happy, but it is not an answer to the outrageous gap in life expectancies between African-Americans and whites. This will be better addressed by national health care reform than Social Security reform.