Briefing Book

White House Conference

Joint Center for Political and Economic Studies Statement from the Joint Center for Political and Economic Studies on Social Security Reform: What Proposed Changes Mean for African Americans Proposed changes in the Social Security system are of special concern to black Americans. In general, blacks are more dependent on Social Security payments for their retirement income than whites, since they are less likely to have private pensions and private savings to complement these payments. Proposals currently under consideration vary tremendously, as do their likely effectiveness and implications for black Americans. The projected shortfall in Social Security funds can only be met by reducing benefits or increasing revenues-or a combination of the two. Proposals to reduce benefits include: Proposals to increase taxation involve taxing Social Security benefits received by each individual in excess of the amounts paid into the system via FICA payroll deductions for the individual. This change would make the taxation of Social Security benefits comparable to that of other contributory defined-benefit pension plans. Their generally lower lifetime earnings and, therefore, greater likelihood of receiving benefits in excess of their contributions into the system suggest that this change might constitute a disproportionate burden on African Americans and other groups with lower-than-average lifetime earnings. Speeding up the scheduled increase in the eligibility age would have a disproportionate impact on groups with shorter than average life expectancies, which again includes African Americans. Currently, the age of eligibility for benefits is scheduled to rise by the year 2022 from 65 years to 67 years for normal retirement and from 62 years to 65 years for early retirement. Any increase in eligibility age for Social Security benefits is more likely to hurt African American males, whose life expectancy from birth is only 65 years, than white males, whose life expectancy is 73 years. Proposals to reduce benefit payments to the disabled would also put African Americans at a greater disadvantage. In 1995, although African Americans were only 12 percent of the U.S. population, they constituted 18 percent of disabled workers receiving Social Security benefits. On the other hand, making Social Security a means-tested program would make African Americans and other disproportionately poor populations more likely to receive benefits than wealthier subpopulations. The alternative to reducing benefits is increasing revenues. Proposals to meet the shortfall by increasing revenues include: Payroll tax revenues can be increased in two ways - by increasing the earnings base that is taxed (and keeping the tax rate unchanged), or by increasing the tax rate (and keeping the earnings base unchanged). The argument for increasing the taxable earnings base above the 1998 maximum of $68,400 hinges on the fact that this current base results in taxing only 84.5 percent of all the wages from covered employment, a lower share than the historic high of 90 percent. Keeping the maximum earnings base at $68,400 and raising the payroll tax rate above the current 6.2 percent is the alternative way to increase the yield from FICA taxes. Increasing the earnings base would cause less of a tax bite for African Americans and other disproportionately poor populations than would raising the tax rate. Expanding coverage to include all workers would primarily capture the 25 percent of full-time state and local government employees who are not covered today. Proposals for expanding coverage usually include a phase-in period to reduce the employer's cost. The implications for African Americans and others employed in jobs that become covered by Social Security in the near future depends on whether the FICA tax is subtracted from gross income in addition to the existing set of deductions, or whether it replaces another retirement plan for which contributions had been deducted previously from worker salaries. The 1994-96 Advisory Council on Social Security, appointed by Donna Shalala, Secretary of the Department of Healthy and Human Services, to examine long-term financing for the system, made two main privatization proposals. Under one, the government would invest in the stock market a portion of all FICA taxes paid. Under the other, a private savings account would be established for each covered individual, and the funds in these accounts would be invested in equities held in mutual funds managed by the government. Other privatization proposals vary in the amount of FICA payments to be invested in the stock market, the nature and management of the private market investment accounts and the types of equities in which investments are made. All of the numerous proposals to privatize part or all of the Social Security system involve potentially significant costs for transition and administration or management. No matter how these costs are borne within the system, they would reduce the net yields from stock market investments. In addition, proposals that create individual accounts but do not make private investment mandatory would enable lower-wage earners to tap into their nest eggs before retirement. This could result in some individuals not having adequate income upon retirement. Even if private investment is mandatory with private savings accounts, those who are very skilled at managing funds and timing withdrawals, or simply lucky, will have high incomes upon retirement; others not so skilled or lucky will have low retirement incomes. The privatization of the Social Security program could transform all three categories of retirement income-Social Security, pensions, and private savings-into defined-contribution plans, that is, those in which the return is determined primarily by the contribution and how it has fared in the stock market. This would mean that the amount of one's monthly retirement income would depend entirely on the fluctuations of the market, with no guaranteed payment minimums. The greater the degree of privatization, the greater the uncertainty created for African Americans. Excerpted from an issue brief on the subject by Wilhelmina A. Leigh and Cecilia A. Conrad.