The Implications of Social Security Reform for Minorities.ppt

1、The Implications of Social Security Reform for Minorities,To understand the implications of any changes made to Social Security, we must first understand the current system. Technically, Social Security is “race-neutral.” People in identical economic/family situations are treated equally. Problem: a

2、ll racial and ethnic groups arent equal. Minorities have different earnings patterns, life expectancies, retirement savings, and disability rates. Minorities rely more heavily than whites on Social Security benefits as an income source during retirement.,SOCIAL SECURITY INTRODUCTION,SOCIAL SECURITY

3、BY RACE,Less likely to have pensions This difference likely to continue far into future Among current workers 21 years and older, fewer minorities have pension plans than whites. Greatest difference: minorities less likely to have other assets that produce income.,Reasons Minorities Need Social Secu

4、rity,Benefits as a Proportion of Income,Higher Minority Poverty Rates,Minority Gains from Social Security,The progressive benefit formula of the current program helps low earners. A disproportionate share of low earners are minorities Benefit formula gives low-earners a higher percentage of their pr

5、e-retirement earnings than high-wage workers. BUT the payroll tax is regressive. Since minorities wages are lower, on average, a high percentage of their earnings are likely to be within the taxable base. The Earned Income Tax Credit (EITC) was originally designed to offset the regressive payroll ta

6、x for low-earning families with children.,Minority Gains from Social Security,Benefits Depend on Earnings. There is a substantial difference in earnings by race. Example: 1995 median earnings in Social Security covered employment: White: $16,360 Black: $11,991,Years out of the workforce decreases So

7、cial Security benefits because they are calculated based on the average of a workers highest 35 years of earnings. Minorities have more years out of the workforce than whites.,Years in the Workforce,A larger percentage of whites receive retirement benefits than minorities. A larger percentage of min

8、orities receive disability and survivor benefits than whites. Low-earners have higher rates of disability than high-earners.Types of BenefitsRetirement Disability Survivors White 72% 12% 16% Black 53% 25% 22% Other 51% 32% 17%,Benefits by Race,People who live longer receive benefits for a longer per

9、iod of time, so they have higher lifetime retirement benefits from Social Security. Lower life expectancy groups receive more disability and survivors benefits.,Life Expectancies by Race,Drawbacks for Minorities,African American males often pay more into the program than they ever receive in benefit

10、s Even if they receive higher proportional benefits because of progressivity, they receive them for a shorter amount of time because of their shorter lifespan. Survivor benefits are limited and benefits paid are not very high. Personal accounts would allow workers to create a nest egg for their fami

11、lies.,Effects on Minorities,Because of their lower life expectancies, Blacks are affected more greatly than whites by the inability to include the Social Security investments they have made over their lifetimes in their estates. Upon death, the money they have invested will leave their spouse and fa

12、mily, except in the limited cases where their families receive survivor benefits. This money then benefits groups with longer lifespan who receive benefits for a longer period of time.,The disability benefits come from a separate program that is financed by a separate tax. Disability benefits are re

13、ceived at a disproportionately higher rate by minorities, but the smaller disability benefits do not entirely make up for the fact that white workers receive more in retirement benefits.,Disability Benefits,Wrap-Up of the Current System,The overall implications of the current Social Security system

14、for minorities are unclear. Minorities have lower life expectancies, so the total benefits they receive on average are less than those of Whites. This drawback is partially offset by the progressivity of the system and by minorities greater receipt of survivor and disability benefits.,The Alternativ

15、e: the Presidents New System,The Presidents Commission to Strengthen Social Security 16-member bipartisan Commission made up of former U.S. Representatives, Consultants to the World Bank and the CEO of Black Entertainment Television Established through Executive Order 13210 to provide recommendation

16、s for modernizing and restoring fiscal soundness to the Social Security System Reported three reform models to the President, all involving personal accounts. We will first focus on the structure and administration of personal accounts and then on the most popular proposal, Reform Model 2,Structure

17、of Personal Accounts,Centralized Approach Payroll collections are transferred to a governmentappointed central administrator using the existing Social Security payroll tax system Workers choose among a limited number of low-cost, diversified investment index funds Governing board contracts fund mana

18、gement to multiple private managers on a competitive basis,Structure of Personal Accounts,Decentralized Approach Payroll collections transferred directly from employers to diversified, private-sector investment funds that satisfy requirements Workers have investment choices through their employers;

19、a wide-range of private-sector funds are available and switching is permitted Government still interacts with each fund and the employers to enforce compliance with regulations,The Two-Tier Approach,Developed to address foreseen problems with both centralized and decentralized approaches Collections

20、 are transferred to central administrator using the existing payroll system; administrator verifies that correct amounts are submitted by each worker Funds in both Tiers cannot charge fees for entry and exit, only an annual charge that is a percentage of assets Investments for each employee are made

21、 through central administrator into Tier 1,Tier 1,Workers select a balanced fund or any combination offered by the Thrift Savings Plan (TSP) for federal workers Balanced fund include corporate and government bonds Three risk levels (conservative, medium and growth) include varied combinations of gov

22、ernment and corporate funds TSP includes: Government Securities Fund; Fixed Income Index Investment Fund; Common Stock Index Investment Fund; Small Capitalization Stock Index Investment Fund; and International Stock Index Investment Fund Inflation-protected Bond Fund allows participants to invest in

23、 Treasury Inflation Protected Securities Fund management auctioned off to private-sector providers. For those who do not choose Tier 1, their contributions must be invested into a standard diversified fund on their behalf. When employees reach a threshold balance, they are allowed to invest accumula

24、ted contributions in a Tier 2 qualified private-sector funds,Tier 2,Private-sector fund managers may offer broadly diversified mutual funds certified by the Governing Board in addition to the Funds offered under Tier 1 Funds must be diversified and reflect the performance of many companies spanning

25、all major commercial sectors Share of funds in individual corporations cannot exceed strict limits set by Governing Board More competition and choice than Tier 1,Limitations in Changes to Investment Allocations,Personal retirement accounts not intended for long-term, short-sighted activities, such a

26、s “day trading” Changes in investment allocations limited to once a year Account information will be immediate through: monthly mailed statements online account access automated calling,Access to Personal Accounts,Workers should not be allowed to consume funds in their personal accounts in a manner

27、that would leave them impoverished during retirement and dependent on the government for additional resources Personal accounts must provide a variety of withdrawal options upon retirement, including the ability to leave assets to loved ones upon death Pre-retirement access to funds in personal acco

28、unts should not be allowed, including withdrawal by disabled persons Commission suggests government action for those who experience financial need before retirement,Retirement Withdrawal Options,Individuals should have immediate right to their money only to the extent that they can support themselve

29、s in the future in order to avoid dependence on the government Forced to take at least some of their money as an annuity or gradual withdrawals Annuity Pays fixed stream of money until person dies Inflation-indexed that protect against loss of purchasing power Standard annuities pay more early in re

30、tirement to prevent loss of purchasing power Gradual Withdrawal Allows individuals to receive fractions of their over their expected lifetime Any money left after death can be fully bequeathed Withdrawal schedule must be long enough to cover expected lifetime of retiree and spouseLump-sum payments a

31、llowed only to prevent impoverishment,Protection for Spouses,Personal account ownership must help provide for current and former spouses welfare in proportion to their contributions to the household All account balances attributable to contributions during marriage, and all earnings on account balan

32、ces brought into marriage, should be equally divided in the event of a divorce Account balances brought into marriage should not be shared Upon retirement, a two-thirds joint and survivor annuity should be required unless both spouses agree to an alternative consistent with the distribution rules di

33、scussed earlier,Reform Model 2,Reform Model 2: Voluntary Progressive Personal Accounts combined with an Inflation-Indexed but More Progressive Traditional System Pros: Establishes voluntary personal accounts, without raising taxes or requiring additional worker contributions Enables all future retir

34、ees to receive an inflation adjusted Social Security benefit New poverty protection Puts Social Security on fiscally sustainable path,Key Elements,Workers who have not reached age 55 (as of January 1, 2002) would be given the opportunity, starting in 2004, to redirect the lesser of $1,000/year or 4

35、% of their payroll taxes, to a personal account. Traditional Social Security benefits would be reduced by personal account contributions compounded at a real interest rate of 2 %. Traditional Social Security benefits would be indexed to price inflation rather than national wage growth beginning in 2

36、009.,Key Elements Ctd.,A minimum benefit provision would increase benefits for 30-year minimum wage earners by approximately 40 percent by 2018 relative to the price indexed benefit level. Benefits for widows would be increased to as much as 75 percent of the combined benefits that would be received

37、 by the couple if both were still alive, versus 50-67 percent under current law. In order to maintain the ability to pay benefits throughout a 75-year period, additional revenue would likely be taken from the General Fund of the Treasury.,Benefits,Workers who opt for personal accounts Expect to high

38、er benefits than the inflation adjusted level currently paid, and the benefits the existing system can afford in the future. Workers who are currently aged 35 who retire in 2032, will have benefits with 17-32 percent higher purchasing power than those received today. More progressive because: Worker

39、s can only redirect a maximum of 4 percent of payroll taxes on entire salary Benefit levels paid to all low-waged workers are raised Workers who do not opt for personal accounts Initial benefit levels grow with inflation Low-wage worker in 2052 would receive benefits that are 27 percent higher in re

40、al terms than those received by a low-wage worker today,Increased Benefits Under Model 2,Fiscal Sustainability Assessment,Model 2 improves Social Securitys financial health and greatly reduces burden on future workers Current system is projected to show deficits as soon as 2016 Model 2 eliminates pe

41、rmanent deficits after a 75-year valuation period without relying on general revenue transfers or higher taxes Should eventually transform projected deficits into perpetually rising surpluses,Improvements Compared to Current Law,Reduction in Rate of Growth in Long Term Costs,New system will lessen t

42、he burden on future generations of taxpayers from a projected 17% to 15% of taxable payroll by 2030 By the end of the 75-year valuation period, the programs expenditure as a percent of GDP would fall below its current level,Transition Financing,Would reduce fiscal pressures on the rest of the federa

43、l government relative to current law No new “transition” cash would be needed before 2010 when $4 billion would be required and then would grow to a maximum $73 billion in the years 2015-2016 Required “transition” funds would decrease until 2029, when the new system would be permanently less expensi

44、ve than the old Total transition investment would be approximately $900 billion (in present value terms),Transition Investment,Impact on Minorities: The Debate,Despite the apparent benefits for all workers, the impact of private accounts on minorities is a hotly contested subject.To hear analysis by

45、 a panel of legislators, economists, and civil rights activists who met on Capitol Hill on March 1, 2005 use the following link: Panel Discussion: The Impact of Social Security Reform for African Americans,The Benefits of Personal Accounts for Minorities,Transformation from a defined-benefit to a de

46、fined-contribution plan would disconnect total benefits from life expectancy. Under the current system, retirees who work all their life but die before retirement receive no benefits after paying into the system throughout their career. Minorities have shorter average life expectancies, so the chang

47、e would eliminate current inequality. Overall, personal accounts have a fairer rate of return without bias in favor of citizens who live longer.,Effects of Life Expectancy,Even if black men only live two years less than white men, that is still 24 less Social Security checks received. Due to differe

48、nces in life expectancies and marriage rates, through Social Security there is a net income difference of $10,000 per person from blacks to whites (study by the RAND Corp.) Social Security taxes crowd out other forms of savings and investment. Because more minorities live paycheck to paycheck, they

49、are unable to accumulate assets and build wealth. One in three black men will pay into the system but die before ever collecting benefits (Cato Institute).,Wealth Accumulation and Private Accounts,Under new system, individuals have property rights to their accumulated income. These rights can be given to heirs if earning citizen dies before exhausting their account Inheritance right is hugely important based on minorities shorter life expectancies. Accounts give low income workers, who are largely minorities, the chance to accumulate capital and begin to bridge the black-white wealth gap.,