Race Bait and Switch

Race Bait and Switch

Race Bait and Switch

The conventional wisdom debunked.
April 22 1999 3:30 AM

Race Bait and Switch

Is Social Security unfair to African-Americans?

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More than a century after freeing African-Americans from slavery, Republicans are promising to liberate blacks from a newer type of government-sanctioned exploitation: Social Security. As part of their effort to seize the Social Security issue, and in particular their campaign for privatization, they argue that the Social Security system rips off blacks for the benefit of whites. Sen. Daniel Patrick Moynihan, a Democrat, has also taken up the cry. And so have some of the media. The March issue of Essence magazine invites readers to visit a "community activist" Web site about Social Security and become involved "to ensure that we get our fair share." The Fort Lauderdale Sun-Sentinel editorialized recently: "The average black male can expect to work all his life to help finance a comfortable retirement in Florida for middle and upper class people, then drop dead a month or two after he collects his first Social Security check." Ron Walters, a professor at the University of Maryland and one of America's best-known black political scientists, has called Social Security "a form of 'reverse reparations.' "

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Their argument is simple and plausible: Everybody pays into the system during his or her working years then gets a monthly check during retirement. Since blacks have a shorter life expectancy than whites, they are getting a worse deal and, in effect, subsidizing longer-living whites.

So, why is this wrong? First of all, Social Security is progressive by design. Everybody pays the same share of income into the system each year (about 6 percent, plus another 6 percent from your employer). But the formula for benefit payouts isn't proportionate to what is paid in: Low-income people get more (not in absolute terms, but compared with their contributions), while affluent retirees get less. A February report by the General Accounting Office confirms that this formula outweighs the effect of lower life expectancy for all low-income people, including African-Americans.

Second, Social Security benefits don't go just to elderly retirees. The program pays benefits to younger people with disabilities that prevent them from earning a living, and also to surviving spouses and minor children of deceased participants. Blacks benefit disproportionately from these aspects of the system. Although only 12 percent of the U.S. population is black, African-Americans get almost a quarter of the Social Security benefits paid to surviving children.

The main source for the Social Security Screws Blacks campaign is a study by (who else?) the Heritage Foundation. Its study has been pretty well demolished by the GAO's actuaries and by a counterstudy by the Center on Budget and Policy Priorities, a liberal think tank. Among other distortions, it assumes that everyone retires at 65, although two-thirds of all workers stop paying in and start collecting benefits earlier than that--which reduces the disadvantage of a shorter life span.

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Heritage calculates that a low-income, single, black male born after 1959 would face a rate of return on his investment in Social Security of -.66 percent, compared with a 1.38 percent rate of return for a random low-income male from the general population. The "rate of return" on Social Security is calculated by imagining that each of a person's payments into the system over the decades is deposited in an account, from which payments from the system are subsequently withdrawn. Then you figure what interest rate on that account would cause the payments in--plus interest--to exactly cover the payments out, and that is the rate of return on Social Security as an investment.

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E ven if Heritage's calculations were accurate, its choice of year would be tendentious. Almost all current retirees are getting a positive rate of return on the very low payments they made for most of their working lives, even if some are getting a better return than others. Conversely, people in their 20s and 30s today will get a negative rate of return, though some will be more negative than others. Heritage chose a year when, by its calculation, the general population was still just barely in positive territory while blacks had moved into negative numbers, in order to claim that blacks' losses were subsidizing whites' profits. That would never be true of the system as a whole, even if it were true of people born around 1959.

The analogy to an investment with a rate of return is only one way to think about Social Security, and not necessarily the best. Another is as insurance against poverty in old age or disability at any age. When you buy auto insurance, you don't hope for a lot of accidents to improve your rate of return on the premiums. Social Security is also a transfer program. The reason the rate of return is so poor for people under 40 is that their money is going to today's retirees, rather than being invested for their own benefit. Proposals to improve the rate of return for Gen X and after, through privatization and what not, invariably omit the money current workers will have to supply to current retirees one way or another from their calculations.

In any event, a government-staffed study of the rate of return on Social Security, the only one based on records of actual workers and retirees, puts Social Security's rate of return at 9.1 percent for whites and 9.6 percent for blacks.