Social Security Shortchanges Minorities
President Franklin Roosevelt did not create Social Security to help the wealthy. He created it to help the elderly poor, 5 million of whom backed a plan by Long Beach physician Francis E. Townsend to create a federal old-age pension. If Roosevelt and Townsend were alive, they would be shocked to discover that Social Security blights the futures of blacks and Latinos, two minority groups that are disproportionately poor.
Consider the low-income, single, black male living in Los Angeles or Detroit. If he is 25 or younger, contributing to Social Security will cost him more than $160,000 (in 1997 dollars) during his lifetime, compared to what he could receive in retirement income if allowed to put his contributions into a combination of Treasury bills, government bonds and other super-safe private investments. For every dollar he pays into Social Security, he can expect back just 88 cents.
Because African American women usually outlive African American men, they fare a little better. But the difference between what a single, young, low-income black female will net under Social Security and what she could make with a low-risk portfolio of government bonds is still at least $93,000.
Is this such a big deal? Of course it is.
Even the smallest differences in return rates translate into thousands of retirement dollars because of compound interest. A low-income Latino man in East L.A., for example, can expect to net lifetime benefits of $38,419 from Social Security. By shifting his Social Security taxes into government bonds, he could enjoy $83,859 in pretax retirement income. And by mixing his investment portfolio equally with stocks and bonds--a typical 401(k) strategy--he could realize $167,480.
Nobody suggests that Social Security hasn’t done members of minority groups some good. Of course it has. The point is Social Security’s dynamics have changed over time. Today, most minorities could do much better under a more flexible system.
Although Social Security aims to help the less well-to-do, it is in fact a regressive tax. It discriminates against low-income workers--again, heavily black and Latino--who are least able to set aside money for better-paying investments. The taxes needed to sustain the system are so high that even most middle-income people have little left to save for retirement.
Consider: In 1972, the average worker paid 8.1% in Social Security payroll taxes on the first $9,000 of wages and salary. By 1997, that worker paid 10.7% on the first $65,400. Between 2020 and 2046, the tax rate will rise to at least 14.4%, making it hard for everyone but the very affluent to amass private savings.
All of this makes it tough for low-income workers to get ahead. When lower-income blacks and Latinos die, they rarely have an “estate” to pass on so their children or grandchildren can move to a better neighborhood, attend a good school or start a small business. So at the lower end of the economic scale, generation after generation of retirees become Social Security-dependent.
Surely it’s time to loosen Social Security’s grip on American workers, especially the poorest among us. By providing them with investment options, we could improve their standard of living in retirement and create billions of dollars in new wealth that would make their children’s lives better than theirs.
