Inequities of Social Security: Leveling Returns among Ethnic-Gender Groups

ABSTRACT All workers earning a given salary contribute equally to Social Security during working years. However, recipients do not receive the same return on investment because life expectancies among population groups are not equal. The disparity can be 20 years or more. Currently, workers dying before retirement age may not only get a zero return on investment, but they may also lose everything they have contributed to the system. To partially rectify that situation, allow privatization of a percentage of a worker's wages that currently go to Social Security. The worker would have ownership rights over the resultant portfolio, and the return on investment for all participants would be significantly increased. In addition, workers dying before age 65 could leave a substantial portfolio to survivors. Workers dying relatively soon after retirement would get reduced benefits from Social Security payments, but portfolio would be larger, on average, than the portfolios of people who die at more advanced ages. The general outcome, therefore, would be a more equitable distribution of the benefits of Social Security among the numerous populations of retirees. INTRODUCTION The Federal government's Social Security program forms the base for the retirement years of over 40 million Americans who are retired today. Ninety-six percent of American workers are covered by Social Security (Social Security Network, 1999, on-line). Most expect to receive retirement income when they quit working. Many people see Social Security (SS) as the most successful program the U.S. government has ever started. Surely, when it was initiated in the 1930s the program filled a need for many workers who lacked the means or the knowledge to provide for retirement. And it was cheap, starting as it did at a required contribution of 2 percent of earnings up to $3,000 per year (Kemp, 1999, on-line). While President Franklin D. Roosevelt made it clear that SS was to augment the workers retirement, many workers now rely exclusively on it for retirement. Only 43% of white workers, 33% of black workers, and 25% of Hispanic workers participate in retirement programs other than SS (Why Is Social Security Important, 2000, on-line). Clearly, complete elimination of the program is not an option. However, SS is under assault today because much has changed in the years since the initiation of SS. The cost has risen to 12.4% of earnings, with the employee and the employer each contributing 6.2 percent. The pay-as-you-go program began with a 43 workers per retiree. Today there are about 3.3 workers per retiree. Around 2030 there will be only two workers per retiree. The lifetime return on the funds contributed to SS pale in contrast to the returns from other retirement options. Most critically, the program is expected to run out of to pay retirees sometime before the middle of the current century, unless steps are taken to resolve the problem. Young people are disillusioned with SS. Many fear that SS will not be there for them when they retire. Others are very aware of the relatively low rate of return earned on SS contributions, and want to wrest control of their money in order to earn higher rates of return. Discussion of SS today focuses on how best to alter the program so as to guarantee its viability. Solutions proposed to address the situation fall into two broad categories. Among the solutions in the first category are raising contributions, reducing benefits, and raising the retirement age. Central to these proposals is that control of the program stays in government hands. The individual has no property rights to his retirement contributions. The second category of solutions is composed of a number of variations of privatization of the program. Under each one, workers would be allowed to personally invest some part of the 12.4 percent paid into SS. If historical stock market returns are any guide, such funds would be expected to earn returns significantly higher than do the funds currently contributed to SS. …