Busting the Social Security Myths

By William E. Spriggs, The Black Commentator. Posted February 18, 2005.

Proponents of Social Security privatization are trying to claim that the current program is unfair to African Americans and that a privatized program would serve African Americans better. This argument lends support to the privatization agenda while at the same time giving its advocates a compassionate gloss. But the claims about African Americans and Social Security are wrong.

The Old Age Survivors and Disability Insurance Program (OASDI), popularly known as Social Security, was put in place by Franklin Roosevelt to establish a solid bulwark of economic rights for the public – specifically, as he put it, "the right to adequate protection from the economic fears of old age, sickness, accident, and unemployment." Most Americans associate Social Security only with the retirement – or old age – benefit. Yet it was created to do much more, and it does.

As its original name suggests, Social Security is an insurance program that protects workers and their families against the income loss that occurs when a worker retires, becomes disabled or dies. All workers will eventually either grow too old to compete in the labor market, become disabled or die. OASDI insures all workers and their families against these universal risks, while spreading the costs and benefits of that insurance protection among the entire workforce. Currently, 70 percent of Social Security funds go to retirees, 15 percent to disabled workers, and 15 percent to survivors.

Social Security is a "pay as you go" system, which means the taxes paid by today's workers are not set aside to pay their own benefits down the road, but rather go to pay the benefits of current Social Security recipients. It's financed using the Federal Insurance Contribution Act (or FICA) payroll tax, paid by all working Americans on earnings of less than about $90,000 a year. While the payroll tax is not progressive, Social Security benefits are – that is, low-wage workers receive a greater percentage of pre-retirement earnings from the program than higher-wage workers.

In the 1980s, recognizing that the baby boom generation would strain this system, Congress passed reforms to raise extra tax revenues above and beyond the current need and set up a trust fund to hold the reserve. (See "Social Security Isn't Broken," Dollars and Sense.) Trustees were appointed and charged with keeping Social Security solvent. Today's trustees warn that their projections, which are based on modest assumptions about the long-term growth of the U.S. economy, show the system could face a shortfall around 2042, when either benefits would have to be cut or the FICA tax raised.

Those who oppose the social nature of the program have pounced on its projected shortfall in revenues to argue that the program cannot – or ought not – be fixed, but should instead be fundamentally changed. Privatization proponents are seeking to frame the issue as a matter of social justice, as if Social Security "reform" would primarily benefit low-income workers, blue-collar workers, people of color and women. Prompted by disparities in life expectancy between whites and African Americans and the racial wealth gap, a growing chorus within the privatization movement is claiming that privatizing Social Security would be beneficial to African Americans.

Opponents attack the program on the basis of an analogy to private retirement accounts. Early generations of Social Security beneficiaries received much more in benefits than they had paid into the system in taxes. Privatization proponents argue those early recipients received a "higher rate of return" on their "investment" while current and future generations are being "robbed" because they will see "lower rates of return." They argue the current system of social insurance – particularly the retirement program – should be privatized, switching from the current "pay-as-you-go" system to one in which individual workers claim their own contribution and decide where and how to invest it.

But this logic inverts the premise of social insurance. Rather than sharing risk across the entire workforce to ensure that all workers and their families are protected from the three inevitabilities of old age, disability, and death, privatizing Social Security retirement benefits would enable high-wage workers to reap gains from private retirement investment without having to help protect lower-wage workers from their (disproportionate) risks of disability and death. High-wage workers, who are more likely to live long enough to retire, could in fact do better on average if they opt out of the general risk pool and devote all their money to retirement without having to cover the risk of those who may become disabled or die, although they would of course be subjecting their retirement dollars to greater risk. But low-wage workers, who are far more likely to need disability or survivors' benefits to help their families and are less likely to live long enough to retire, would then be left with lower disability and survivors' benefits, and possibly no guaranteed benefits. This is what the Social Security privatization movement envisions. But you wouldn't know it from reading their literature.

This article originally appeared in Dollars and Sense magazine.

William E. Spriggs is a senior fellow with the Economic Policy Institute and was formerly the executive director of the National Urban League Institute for Opportunity and Equality.

Liked this story? Get top stories in your inbox each week from AlterNet! Sign up now »