Mr. Jimenez indicated that surviving spouses of workers with no children would receive only a $255 death benefit from Social Security. This is just the initial benefit. In addition, surviving spouses would receive survivors benefits from the time they turn 62 (or 50 if they are disabled) until the day they die. These benefits are adjusted for inflation each year. Over the course of a lifetime, these survivors benefits accumulate to tens of thousands, and in some cases hundreds of thousands, of dollars in benefits.
Mr. Jimenez also noted that a disability and survivors insurance coverage could be acquired in the private market at relatively reasonable rates under an individual accounts system. There are some private life and disability insurance plans available that have affordable premiums for some, but not all workers. Workers with the lowest incomes would, on average, be likely to face the highest premiums if they qualified for such insurance at all.
Disability insurance premiums are based in part on the occupation and health of the applicant. The greater the physical risk of the occupation and the less healthy the worker, the greater the probability of not qualifying for coverage and the higher the premium for those who do qualify. Workers with lower wages are more likely to be employed in jobs that require physical exertion. In addition, low-income earners have a greater propensity for poor health since they generally have fewer resources with which to obtain health care. As a result, some low-income workers could find themselves unable to secure coverage or unable to obtain coverage they could afford.
Similarly, the cost of a life insurance policy varies greatly depending on an applicant's health. A term life insurance policy worth $200,000 would cost a 38-year-old man in good health approximately $225 to $350 per year, while the same individual in poor health could pay from $900 to several thousand dollars per year or be uninsurable.
Finally, Mr. Jimenez raised a point that has not received much attention in our discussion thus far - the unfunded liability. The unfunded liability is the difference between 1) the amount of money needed to pay current workers and beneficiaries over the next 75 years and 2) the value of assets in the Social Security trust funds plus the projected payroll taxes from current workers. Since Social Security is primarily a pay-as-you-go system (payroll taxes contributed by current workers pay for the benefits of current beneficiaries) the unfunded liability is quite large. The Social Security actuaries estimate that the unfunded liability is about $9 trillion. What is often overlooked by proponents of individual accounts is the fact that this cost must be paid whether we maintain the structure of the Social Security system or switch to a system of individual accounts.
If payroll taxes are diverted into individual accounts, the funds will have to be raised to replace these taxes so that benefits for current beneficiaries can be paid. The amount of funds that must be raised is the transition cost. The transition cost lowers the rate of return for individual account holders because they would have to pay for current beneficiaries and for their individual accounts. The Employee Benefit Research Institute estimated the rate of return for individual accounts options and options that would maintain the present structure of Social Security. They found that for workers who are 21 today and receive low wages, the rate of return would be lower under the individual accounts options it examined than under all options it examined to restore long-term balance to Social Security without individual accounts.
