Who Benefits from Social Security Reform?

Commentary by Pete du Pont

The White House has begun its media blitz about Social Security reform, which will culminate in the White House Conference on Social Security on December 8 and 9.

The essence of the White House's message, since President Clinton doesn't actually have a plan, is to move slowly on reform. There will be cautious words about not doing anything that would harm seniors or minorities or lower-income workers.

But in truth, Social Security reform should be accelerated for the evidence is clear that fundamental Social Security reform will help those at the margins, not hurt them. A number of think tanks have been looking into the question of who would benefit and who would be harmed by letting workers deposit part -- and, perhaps at some time the future, all -- of their Social Security payroll tax into personal retirement accounts. The answer is, everyone would benefit.

Let's begin with seniors, since that is the group most easily frightened by the notion of Social Security reform -- and with the least reason. As Senator Phil Gramm (R-Texas) says, if you're a senior on Social Security "you don't have a dog in this fight." Why? Because no serious Social Security reform proposal would change anything for those in retirement or close to it. These people have paid into Social Security their entire lives, expecting a certain type of benefit, and they will receive that benefit, so nothing should change for them.

Next, let's look at minorities. According to the U.S. Census Bureau, black males have a life expectancy of 64.9 years from birth, while white females are expected to live 79.6 years, a 15-year difference. To arrive at that average life expectancy, however, many black males have to die before they ever reach the age of 65. According to the Census Bureau:

Almost half (43 percent) of all black males will die before they reach 65, compared to compared to only 13 percent of white females.

Since only about 3.5 percent die by age 20, almost 40 percent of all black males will contribute something to Social Security but receive nothing from it.

About 2.5 times as many white women will reach age 80 as black males.
Since 40 percent of black males pay into the Social Security system but die before they are able to qualify for benefits, their contributions are transferred to other living retirees, not the deceased's family. However, were black males with personal retirement accounts to die early, their accounts would become part of the estate.

But wouldn't reform hurt the working poor, since the current Social Security distribution scheme is "progressive," benefiting lower-income workers more than high-income workers? According to a new study by the Cato Institute, a worker born in 1970 and making $13,500 a year and retiring at age 67 could expect about $127,366 from the current Social Security system, compared to $488,862 if the money had been invested in a stock fund making a 7.5 percent real rate of return. Even a very conservative bond fund earning only a 4 percent real rate of return would give the retiree $177,147.

Even union workers would benefit from switching to a system of personal retirement accounts -- an interesting fact given that union leaders are some of the most vocal opponents of Social Security reform.

According to a new study from William Beach and Careth Davis of the Heritage Foundation, which examined 20 union households, "losses under the current retirement portion of the Social Security system . . . run into hundreds of thousands of dollars, compared with what they would have received had their payroll taxes been placed in conservative 401(k)-type assets."

For example, because of their shorter-than-average lifespans, union miners have a poor return: "For every dollar that he pays into the Social Security system, the single male miner analyzed in this study will receive back only 68 cents."

However, even with a "cautious investment portfolio," union workers could expect "at least 2 percentage points, and in most cases more than 3 percentage points, above the yield on Social Security."

Such projections are not unrealistic. In 1981 and 1982, three Texas counties switched from traditional Social Security to a private system that invests the payroll takes of some 5,000 county workers with top-rated financial institutions. Returns have averaged 6.5 percent over the intervening 17 years, and union workers, who initially opposed the change, are very satisfied.

As the research grows so does the evidence that fundamental Social Security reform that would gradually shift from the current financially strapped system to one of individual retirement accounts would benefit everyone.

What President Clinton needs to do is cancel the media events and begin the discussion about real reform.

The National Center for Policy Analysis is a public policy research institute founded in 1983 and internationally known for its studies on public policy issues.