Social Security and Minorities: Current Benefits and Implications of
Reform (Testimony, 02/10/99, GAO/T-HEHS-99-60).
Pursuant to a congressional request, GAO discussed minorities and social
security, focusing on: (1) how minorities currently fare under social
security; (2) how they might be affected by some of the proposed changes
in benefits to restore the program's solvency; and (3) how minorities
might fare under a system restructured to include individual accounts.
GAO noted that: (1) while social security's benefit and contribution
provisions are neutral with respect to race, ethnicity, and gender, GAO
found that because of certain socioeconomic characteristics, minorities
have benefited from the social security program; (2) because minorities
are more likely than whites to have lower lifetime earnings, they are
advantaged by social security's progressive benefit formula that
provides larger relative benefits for lower-paid workers; (3) moreover,
blacks in particular are more likely to receive other important social
security benefits, such as disability, that help protect against lost
earnings; (4) certain reforms that would reduce benefits to help restore
solvency could have a disproportionate effect on low-wage earners,
including blacks and Hispanics, depending on how they are structured;
(5) for example, raising the age of retirement would lower the average
lifetime benefits of blacks relative to whites because of blacks' lower
life expectancy; (6) restructuring social security to include individual
accounts would also likely have varying effects on different racial and
ethnic groups; (7) however, GAO's analysis indicates that education and
family income are better predictors of individuals' investment behavior
than race; (8) individuals with less education and lower incomes tend to
invest more conservatively than those with more education and higher
incomes; (9) because blacks and Hispanics are more likely to have less
education and lower incomes, they would likely earn smaller returns on
their accounts, although they would bear less risk; and (10) these
results suggest that if individual accounts were adopted as an element
of comprehensive social security reform, investor information and
education would be needed to help low-income individuals with their
investment decisions.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-HEHS-99-60
TITLE: Social Security and Minorities: Current Benefits and
Implications of Reform
DATE: 02/10/99
SUBJECT: Minorities
Disadvantaged persons
Social security benefits
Blacks
Hispanics
Federal social security programs
Investments
Retirement benefits
IDENTIFIER: Social Security Disability Insurance Program
Social Security Program
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Cover
================================================================ COVER
Before the Subcommittee on Social Security, Committee on Ways and
Means, House of Representatives
For Release on Delivery
Expected at 1:30 p.m.
Wednesday, February 10, 1999
SOCIAL SECURITY AND MINORITIES -
CURRENT BENEFITS AND IMPLICATIONS
OF REFORM
Statement of Cynthia M. Fagnoni, Director
Income Security Issues
Health, Education, and Human Services Division
GAO/T-HEHS-99-60
GAO/HEHS-99-60T
(207029)
Abbreviations
=============================================================== ABBREV
SOCIAL SECURITY AND MINORITIES:
CURRENT BENEFITS AND IMPLICATIONS
OF REFORM
============================================================ Chapter 0
Mr. Chairman and Members of the Subcommittee:
Thank you for inviting me here today to speak about minorities and
Social Security. Social Security has had a significant and positive
effect on the nation's elderly. Since 1959, poverty rates for the
elderly have fallen from 35 percent to 10.5 percent, thanks largely
to this social insurance program. Nevertheless, elderly
African-Americans and Hispanics are much more likely to be living
below the poverty line, even with the program's important benefits.
For example, 28 percent of African-Americans and 27 percent of
Hispanics aged 65 and older have incomes below the poverty threshold,
compared with 11 percent of similarly aged Caucasians.\1
My remarks today focus on (1) how minorities currently fare under
Social Security, (2) how they might be affected by some of the
proposed changes in benefits to restore the program's solvency, and
(3) how minorities might fare under a system restructured to include
individual accounts. The information I am providing today is based
on preliminary findings from work we are currently doing for
Representative Charles B. Rangel, Ranking Minority Member of the
full Committee on Ways and Means.
In summary, while Social Security's benefit and contribution
provisions are neutral with respect to race, ethnicity, and gender,
we found that because of certain socioeconomic characteristics,
minorities have benefited from the Social Security program. Because
minorities are more likely than whites to have lower lifetime
earnings, they are advantaged by Social Security's progressive
benefit formula that provides larger relative benefits for lower-paid
workers. Moreover, blacks in particular are more likely to receive
other important Social Security benefits, such as disability, that
help protect against lost earnings. Certain reforms that would
reduce benefits to help restore solvency could have a
disproportionate effect on low-wage earners, including blacks and
Hispanics, depending on how they are structured. For example,
raising the age of retirement would lower the average lifetime
benefits of blacks relative to whites because of blacks' lower life
expectancy.
Restructuring Social Security to include individual accounts would
also likely have varying effects on different racial and ethnic
groups. However, our analysis indicates that education and family
income are better predictors of individuals' investment behavior than
race. Individuals with less education and lower incomes tend to
invest more conservatively than those with more education and higher
incomes. Because blacks and Hispanics are more likely to have less
education and lower incomes, they would likely earn smaller returns
on their accounts, although they would bear less risk. These results
suggest that if individual accounts were adopted as an element of
comprehensive Social Security reform, investor information and
education would be needed to help low-income individuals with their
investment decisions.
--------------------
\1 Most of the data sources we relied on used the terms blacks,
whites, and Hispanics. Therefore, for the remainder of this
testimony we use the same terms. Although we recognize that there
are other minority groups, such as Asians and Native Americans, for
the most part the data were not broken down finely enough for us to
look at them separately.
BACKGROUND
---------------------------------------------------------- Chapter 0:1
The Social Security program is the foundation of the nation's
retirement income system. Since 1940, Social Security has been
providing benefits to the nation's eligible retired workers and their
dependents. In addition to retired worker benefits, Social Security
protects covered workers who have severe disabilities and their
dependents through the Disability Insurance (DI) program. Also,
spouses and children of deceased workers may receive Social Security
survivor benefits. As a social insurance program, Social Security
allows workers to pool the risks they face from a loss of earnings
that results from retirement, disability, or death.
Social Security's benefit formula redistributes income from high-wage
earners to low-wage earners to help keep low-wage earners out of
poverty. Benefits are based, in part, on an individual's earnings,
but when calculating actual benefits, Social Security uses a
progressive formula that replaces a relatively larger portion of
lifetime earnings for people with low earnings than for people with
high earnings. To calculate Social Security benefits, Social
Security uses average indexed monthly earnings, defined as a worker's
lifetime covered earnings over his or her 35 highest earnings years.
A progressive benefit formula is applied to these lifetime earnings
to determine the benefit that would be payable to the worker at age
65. The benefit is then adjusted for the age at which the worker
first receives the benefit.
The Social Security system currently faces a long-term solvency
problem. As you know, the Social Security trust funds are predicted
to begin paying out more in annual benefits than they collect in
taxes in 2013 and are expected to be depleted by 2032.\2 A number of
proposals have emerged to resolve this financing problem, with a
great deal of variety in terms of both how the Social Security
program would be structured and who would be eligible for benefits.\3
Some of these proposals would restore solvency within the existing
program structure, while others call for some form of restructuring
to include individual accounts as an element of reform. Many major
proposals would provide a significant defined benefit as a base with
voluntary or mandatory individual accounts included as an element of
the plan.\4 In the current national debate over how best to restore
Social Security's long-term solvency, some researchers have argued
that minorities, particularly blacks, would fare better under a
system that included some individual account element.\5 They argue
that certain minorities are more likely to have specific
characteristics that result in their receiving lower benefits than
others under the current system.
--------------------
\2 The relevant figures include both the Old Age and Survivors
Insurance program and the Disability Insurance program.
\3 The President's recent Social Security reform proposal, for
example, would extend Social Security solvency until 2055. It would
not, however, fundamentally reform the Social Security benefit
program.
\4 Defined benefit refers to a benefit based on a specific formula
linked to a worker's earnings and years worked.
\5 W. Beach and G. Davis, "Social Security's Rate of Return,"
Heritage Center for Data Analysis, Heritage Foundation, Washington,
D.C., 1998.
HOW MINORITIES CURRENTLY FARE
UNDER SOCIAL SECURITY
---------------------------------------------------------- Chapter 0:2
Although Social Security's benefit and contribution provisions are
neutral with respect to race, ethnicity, and gender, some researchers
have questioned how well some minorities, especially blacks, have
fared under the existing Social Security system because they have
lower life expectancies. Differences in life expectancy affect the
length of time that individuals from different racial and ethnic
groups can expect to pay into the Social Security system and collect
retired worker benefits. For example, white males born in 1998 can
expect to live for 74 years, black males for 64.3 years, and Hispanic
males for 75 years. These differences become much less pronounced,
but still exist, for individuals who survive to age 65. At age 65,
in 1998, white men can expect to live 2.3 years longer than black
men, and Hispanic men can expect to live 2.9 years longer than white
men. The projections of life expectancy for white, black, and
Hispanic women at age 65 are 19.5, 17.6, and 22.2 years,
respectively.
However, life expectancy is only one of many factors that affect the
level of benefits that people receive from Social Security, relative
to what they contribute. Social Security's progressive benefit
formula has particular importance for blacks and Hispanics because
they tend to have lower lifetime taxable earnings than whites. The
consensus among researchers is generally that the progressivity of
the benefit formula outweighs the negative effect of lower life
expectancy for blacks in terms of what they receive from Social
Security relative to what they contribute. Hispanics' longer life
expectancy, combined with the progressive benefit formula, indicates
that they fare even better than blacks under Social Security.
None of the currently available studies have included disability or
survivors benefits in their assessments of the benefits minorities
receive from Social Security.\6 Blacks rely more heavily than others
on these features of the program, which provide important protections
against the loss of earnings caused by disability or death. While
blacks currently make up 12 percent of the U.S. population, they are
overrepresented in these beneficiary categories. For example, blacks
make up 23 percent of child beneficiaries (as children of retired
workers, disabled workers, or deceased workers), 18 percent of
disabled workers, and 14 percent of survivors of deceased workers.
Put another way, 47 percent of black beneficiaries are receiving
either disabled or survivor benefits, while only 28 percent of whites
are receiving benefits in these categories. In contrast, blacks make
up only 8 percent of all retired worker beneficiaries, while whites
make up 90 percent of this category.\7
--------------------
\6 We are currently working with a special data set, provided by the
Social Security Administration and the Bureau of the Census, that
will allow us to make more complete estimates of minorities' total
returns to Social Security, including disability and survivors
benefits. This information will be forthcoming in a report to
Representative Charles B. Rangel, Ranking Minority Member of the
House Committee on Ways and Means, later this year.
\7 Hispanics were not reported separately and are included in the
numbers for whites and blacks. The final 2 percent of retired worker
beneficiaries includes Asians and Pacific Islanders, American Indians
and Alaskan Natives, and a subset of the total number of
beneficiaries of Spanish origin.
HOW MINORITIES MIGHT BE
AFFECTED BY VARIOUS REFORM
PROPOSALS WITHIN THE EXISTING
PROGRAM STRUCTURE
---------------------------------------------------------- Chapter 0:3
The changes contained in various Social Security reform proposals
could have disproportionate effects on minorities but these would
vary depending on the nature of the reforms. Many reform proposals
include provisions that would reduce current benefit levels by, for
example, increasing the number of years of taxable earnings used to
calculate benefits from 35 years to 38 or 40 years. Even a
proportional reduction in benefits such as this could have a more
serious effect on minorities since their lower overall incomes put
them much closer to or below the poverty line to begin with.
Many Social Security reform proposals include a provision to raise
the normal age of retirement to age 70. Some proposals would also
increase the early retirement age from 62 to 65. Any increase in the
age at retirement would decrease the number of years during which
individuals would collect benefits while increasing the number of
years they would pay Social Security taxes. Because blacks, on
average, already can expect to spend fewer years in retirement than
whites as a result of their shorter life expectancy, they would
experience a greater relative reduction in benefits, compared with
whites, from an increase in the Social Security retirement age.
Given Hispanics' longer life expectancy, the negative effect of
raising the retirement age would be smaller in relative terms. At
the same time, an increase in the ages of early and normal retirement
would have implications for the DI program. Raising the early and
normal retirement ages would create a financial incentive for
individuals in poor health to apply to the DI program because the gap
between disability benefits and retired worker benefits would
increase. Moreover, as individuals stay longer in the labor force,
more older workers will become disabled. Assuming that current
disability trends continue, proportionately more of these disabled
workers would be black.
HOW MINORITIES MIGHT FARE UNDER
A SYSTEM RESTRUCTURED TO
INCLUDE INDIVIDUAL ACCOUNTS
---------------------------------------------------------- Chapter 0:4
Many reform proposals would fundamentally restructure Social Security
by creating retirement accounts that individuals would own and
manage. Many proposals would provide a defined benefit but would
also include an individual account feature. For example, the plan
put forth by the National Commission on Retirement Policy includes a
minimum benefit provision that is set at the poverty line for
individuals who have worked for 40 years and directs 2 percentage
points of the payroll tax into individual savings accounts. Because
no research has previously been done on minorities' investment
patterns, we have estimated the effect of race on individual
investment behavior. Using national survey data, we estimated the
probability that people with Individual Retirement Accounts (IRA)
would invest their accounts in stocks and mutual fund shares.\8 Our
preliminary results indicate that individuals with higher family
income and more years of education are more likely to invest in more
volatile but potentially higher-yielding assets such as stocks and
mutual funds. On average, blacks and Hispanics have lower family
incomes and fewer years of education than do whites. We found that
controlling for these and other characteristics, black IRA holders
are still somewhat less likely to invest in stocks and mutual fund
shares than whites.\9 We also found that Hispanic IRA holders are
neither more nor less likely than whites to invest their accounts in
stocks or mutual fund shares, once we controlled for the other
demographic characteristics.
Individuals who chose a relatively low-risk investment strategy for
their retirement income accounts would be likely to earn lower rates
of return over longer periods of time but would not be as exposed to
large losses from riskier assets. While it is true that in the past
U.S. stocks have almost always posted higher returns over time than
less risky assets, there is no guarantee that they will always do so,
especially for shorter investment horizons.
Our analysis also revealed that blacks and Hispanics are much less
likely to have interest earnings from any other type of savings
vehicles such as savings accounts, money market funds, certificates
of deposit, or mutual fund accounts. Individuals unfamiliar with
making investment choices may need assistance in understanding and
managing their individual account investments. Providing low-income
and less well-educated individuals who have limited investing
experience--including some blacks and Hispanics--with appropriate
information may be particularly challenging. Nevertheless,
information that covers general investment principles and financial
planning advice would be essential in helping all investors to better
manage their accounts. It is not clear who would provide such
information to workers under a restructured Social Security system
that included mandatory individual accounts. Within the private
pension system, there are mechanisms for people to learn more about
investing. For example, some employer-sponsored pension plans
provide written material or contract with a financial planning
service to give employees information about investing. It might be
possible to draw from these experiences in structuring an investor
education program for Social Security. The nature and extent of
these information and education efforts, when combined with the
design of related investment options, would be especially important
to helping maximize the effectiveness of, and minimize the risk
associated with, individual accounts under the Social Security
system.
--------------------
\8 We used a cross-section of people from Census' 1992-93 Survey of
Income and Program Participation. Because of data limitations, we
were able to look only at the investment decisions of people with
IRAs. In the full sample, blacks and Hispanics were less likely to
have an IRA account than whites. In general, respondents with IRAs
had higher family income, had completed more years of education, were
older, were more likely to be married, and had fewer children than
those without IRAs.
\9 This result was significant at the 90-percent confidence level.
The analysis did not control for differences in levels of wealth,
which would also explain some of the differences in investment
behavior.
CONCLUSIONS
---------------------------------------------------------- Chapter 0:5
The Social Security system has benefited minorities through a benefit
formula that favors lower-paid workers and through important social
insurance features, including disability benefits. Because blacks
and Hispanics are more likely to have lower overall incomes than
whites, certain reforms, such as increasing years of covered
earnings, would have a more serious effect on them, because they are
already closer to the poverty line. Because blacks and Hispanics on
average have lower incomes and are less well educated than whites,
the creation of mandatory individual accounts could also decrease
their benefits relative to those of whites if they invested more
conservatively. Our work suggests that providing information and
education would be essential, especially to low-income individuals
who would be making investment decisions for the first time.
Investor education that covers general investment principles and
financial planning advice might help all new investors to better
manage such accounts.
-------------------------------------------------------- Chapter 0:5.1
This concludes my prepared statement. I would be happy to answer any
questions you or other Members of the Committee may have.
*** End of document. ***