|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.|
Swarthmore of New York, NY, asks :
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.
Tanner and Darcy Olsen respond:
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).
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.