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Tuesday’s release of the annual report of the Social Security and Medicare trustees presented dark forecasts about the state of the trust funds. While the actuaries reported acceleration in Medicare’s projected insolvency date, Social Security’s outlook remained unchanged with an imbalance projected for the year 2042. With the release of the new projections, social insurance nihilists are once again trumpeting the need for Social Security “reform.”

For decades, Social Security has been targeted by those who want to replace its guaranteed benefits with private accounts that individuals invest in the stock market. Using various methods to convince the American public of their position, privatization advocates have shamefully ventured into dangerous territory by claiming that traditionally marginalized groups will benefit from their ill-advised schemes.

Advocates of privatization have shrewdly played the wealth creation card to attract economically disadvantaged groups—like African Americans, Hispanics, and others—to their cause. They argue that these populations can make up for centuries of discrimination and disadvantage by investing their hard earned Social Security dollars in private equities where they can earn inheritable wealth with the magic of compound interest.

While it should be easy to dismiss these proposals as irresponsible, there are startling indications that these arguments may be gaining ground in African-American communities. A 1998 survey conducted by the Joint Center for Political and Economic Studies asked respondents if they favored or opposed a Congressional plan that would reduce the Social Security payroll tax by two percentage points and allow workers to put the money into personal retirement accounts. A full 68 percent of African Americans said that they favored such a proposal. Most recently, Rep. Harold Ford, Jr. — a member of the Congressional Black Caucus — has openly considered the possibility of supporting privatization after citing the need for more wealth creation in low-income communities.

Despite these indicators, African Americans and other economically disadvantaged groups must take care to understand the importance of Social Security and the implications of privatizing the system. Traditionally perceived as just a retirement plan, Social Security is a comprehensive family insurance plan that provides critical support for the families of deceased and disabled workers.

While only 12 percent of the U.S. population, African Americans are 17 percent of those receiving Social Security disability benefits and 22 percent of all children receiving Social Security survivor benefits according to the Social Security Administration. According to the Social Security Administration, an estimated 68 percent of disabled African Americans are kept out of poverty by Social Security’s disability benefits. Furthermore, a 1999 study by the National Urban League Institute for Opportunity and Equality estimated that African-American children are almost four times more likely to be lifted out of poverty by Social Security survivor benefits than are white children.

Social Security remains important even for African-American retirees, who tend to have lower earnings and less pension coverage than white Americans. Indeed, Social Security administrative data indicates that upon retirement, 65 percent of white Americans have income from assets compared to only 28 percent of African Americans. As a result, Social Security is the only source of retirement income for 40 percent of older African Americans.

African Americans also benefit from Social Security’s progressive benefit structure, which replaces a larger percentage of low-income beneficiaries pre-retirement earnings. Combined with a cost of living adjustment that increases annually for a lifetime, the current system guarantees steady and stable benefits for African-American families.

There are good reasons why private individual accounts represent a bad deal for African Americans. First, because private retirement account proposals seek to divert money away from the current system, they undermine the economic viability of the survivor and disability components of the Social Security system—the very programs upon which African Americans and their children heavily rely.

With survivor and disability programs under-funded or de-funded by private retirement accounts, it would be difficult for black families to find comparable coverage that is affordable in the private insurance market. This would be particularly harmful to widows and children who disproportionately rely on these benefits.

Additionally, a carve-out approach would increase retirement insecurity for African Americans because it would eliminate the guaranteed benefits of the current system while exposing them to greater risk in private markets. African-American seniors on a fixed income would be economically devastated in the event of a market dip or crash.

Private accounts would also eliminate the progressive aspects of the current system that provides more help for low-income people. A recent bill introduced by Rep. DeMint claims to add a progressive structure to private accounts by allowing low-income individuals to invest a greater percentage of their funds in the market. Yet, this type of “progressive” structure is questionable since it would expose these individuals to even greater market risk.

Arguments that claim that private retirement accounts would lead to great wealth are highly misleading, as low-income individuals would only accrue interest (assuming a healthy stock market) on their smaller contributions. Because of existing wage inequalities, race-based income disparities would remain even if individuals earn the same rate of return. Because private accounts also eliminate cost of living adjustments, their advantages over the current system are questionable at best.

In addition, because African Americans have higher unemployment rates, they are more likely to be disadvantaged because, unlike Social Security, private accounts would not compensate for time spent out of the workforce.

There are a host of other reasons why it makes little sense to privatize Social Security. In addition to high administrative costs, supporters of individual accounts admit that it would take trillions of dollars of general taxpayer funds to make these proposals work. Yet, with the Clinton surpluses replaced by steep Bush deficits, it should be apparent that the nation could not afford these proposals even if they were conceptually sound.

Ironically, the possibility remains that the Bush Administration may push to implement private accounts by drastically reducing or eliminating funding for other social programs important to African-American communities. Their strategy would severely undermine the socioeconomic status of the very populations privatization advocates are claiming to help.

While it is certainly valid to promote the need for wealth creation strategies for African Americans and other economically disadvantaged communities, it is disingenuous at best to argue that privatizing Social Security is the best way to accomplish this goal. Socially responsible policy experts need to focus on devising asset development proposals that can supplement Social Security’s guaranteed foundation of financial support.

And, while Social Security could use some adjustments to correct its long-term fiscal imbalance of 25 cents on every dollar in the year 2042, there are certainly more responsible ways for securing the system for generations to come. Repealing the Bush Administration tax cuts represents one solid proposal that would do much to close the gap.

Clearly, sustained efforts are needed to educate African American and other targeted populations about the dangers of those promising a pot of gold at the end of the privatization rainbow. For there is no wealth guarantee in privatizing Social Security and proposals to the contrary are as elusive as rainbows.

  • Additional Resource: Social Security Reform and African Americans, Debunking the Myths (DOC, RTF, PDF)

Maya Rockeymoore, Ph.D., is the vice president for research and programs at the Congressional Black Caucus Foundation and is the co-editor of Strengthening Community: Social Insurance in a Diverse America (Brookings Press, 2004).

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