This is a co-written paper for an economics independent study with Joe Craven, and Dr. Gouri Suresh at Davidson College co-written with Michaela Gibbons and Bryce Kalsu
According to scholar and activist Ibram X. Kendi, an antiracist policy is “any measure that produces or sustains racial equity between racial groups” (2019). In his book, How to Be an Antiracist, Kendi defines racial inequity as “when two or more racial groups are not standing on approximately equal footing,” which can either be produced, sustained, or counteracted through policies (2019).
In the United States, racial wealth inequality is a fact. The Federal Reserve reported in 2019 that, on average, white families have eight times as much wealth as Black families and five times as much as Hispanic families (Bhutta 2020). A household’s ability to build intergenerational wealth is determined by its income, savings, financial and non-financial assets, and community’s economic activity (Noel et al. 2019). Black households have uneven access to these wealth accumulation tools, which impedes their ability to achieve financial security (Bhutta 2020; Noel et al. 2019).
The racial wealth gap in America, however, does not exclusively impact people of color. Its dampening effect on investment and consumption is estimated to cost the U.S. economy between $1 trillion and $1.5 trillion from 2019 to 2028 (Noel et al. 2019). Rising wealth inequality has stifled the growth of aggregate demand in the U.S. economy (Bivens 2017). The Black-white wealth disparity widens when American workers reach retirement age. This disparity leaves elderly Black Americans more vulnerable to poverty (Sanzenbacher 2020). While a family’s wealth increases over time, so does the wealth gap between white and non-white American households.
TABLE 1: Wealth rise with age for all families, but substantial wealth gaps between white and non-white families persister throughout the life-cycle.
In this paper, we examine how Social Security reforms may impact the extent of racial wealth inequality. Social Security is one—if not the most—crucial federal program that addresses financial insecurity for retired and disabled workers and their families. At its inception in 1935, President Franklin D. Roosevelt and the U.S. government set a clear precedent for what Social Security symbolizes to American citizens:
We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age (F. Roosevelt 1935).
Social Security is social insurance that protects elderly Americans from the financial pitfalls of old age. But it is also the largest single line item in the federal budget, accounting for 23% of its total (“Policy Basics: Top Ten Facts about Social Security” 2020). In 2018, benefits costs were equivalent to 4.9% of GDP. The social security actuarial predicts this figure will increase to 6% over the next 75 years (OASDI Trustees Report 2019). The program provides a significant amount of financial security to retirees and disabled individuals and their families by distributing monthly payments to beneficiaries as a partial income replacement.
Social Security affects nearly everyone in America. In 2019, approximately $979 billion were paid in payroll taxes to Social Security, and over $1 trillion in benefits were paid to 69.1 million beneficiaries (“Fast Facts and Figures About Social Security” 2020). The program has successfully reduced poverty among the elderly and their dependents, especially the lowest lifetime earners who have higher income replacement rates.
As a consequence of the country’s intergenerational racial wealth gap, Black beneficiaries, on average, are more dependent on Social Security insurance in retirement than their white counterparts. Because Black Americans have less wealth and fewer wealth-building resources, they were twice as likely as the general population to be financially insecure in old-age in 2019 (Census 2020). Without Social Security, elderly Black Americans ages 65 and older would face poverty rates as high as 60% (Fagnon 1999). In addition, beneficiaries of color are more likely to receive disability and survivor benefits from the program. Today, 45% of Black Americans receiving Social Security benefits report that the program’s partial income replacement provides over 90% of their total income (Hendley and Bilimoria 1999).
Figure 1: Poverty rates for groups with and without Social Security benefit receipt, by race/ethnicity, 1997.
In 2020, the Board of Trustees reported that Social Security had $16.8 trillion in actuarial deficit, meaning that the amount of revenue projected to be available over the next 75 years will be insufficient to pay scheduled benefits (OASDI Trustees Report 2020). Unless Congress reforms the program, we can anticipate an approximately 20% decrease to benefits across the board, likely in the early 2030s. Any cut in benefits will disproportionately impact Black beneficiaries. Because Social Security is out of balance, Congress will likely need to reform it sometime in the next decade. Its importance to Black Americans makes it critical to examine through an antiracist lens as this paper intends to do. There is also a concern that future generations, such as Generation Z and Alpha, will be burdened with fixing the program’s solvency and efficacy. As college students, beginning to enter the labor force, we demand “a sound and a uniform system which will provide true security” to those who need it (F. Roosevelt 1934).
- What is Social Security?
In the late 19th century and proceeding into the early 20th century, the U.S. evolved from an agricultural economy where families were self-sustaining to an industrial economy that encouraged individual laborers to seek employment outside of their homes. This shift, along with the advancements of medicine, resulted in a nonworking elderly population that was more vulnerable to financial insecurity. To rectify the problem, President Franklin D. Roosevelt and his Secretary of Labor, Frances Perkins, implemented a social insurance plan: The Social Security Act of 1935 (DeWitt 2010).
This landmark legislation was intended to protect a portion of working Americans against the expenses of illnesses and old age. Without the program, these vulnerable elderly would be left destitute (Hendley and Bilimoria 1999). It is not an entitlement or pension program but an earned benefit available to elderly Americans and can serve as a financial lifeline to low-income retirees. The basic framework of Social Security as social insurance sponsored by the federal government has remained, although the program itself has evolved extensively over the years, reaching near-universal participation. Social Security benefits are similar to life annuities, where beneficiaries receive a series of monthly payments until their death. This “defined benefit” insurance plan considers each beneficiary’s age, income over time, and years of employment to determine the size of their monthly payments.
The federal government applies principles beyond actuarial insurance to Social Security, including social adequacy and equity of benefits. Benefits should be adequate in that the program should provide suitable economic security for those who work their whole lives. Benefits should also be equitable, meaning each benefit payment should be related to each participant’s contribution to the system (DeWitt 2010, 5).
Monthly benefit payments were not intended to fund all the needs of retirees but certainly an amount sufficient to prevent poverty. Employees and employers equally pay a payroll tax called Federal Insurance Contributions Act (FICA) into a reserve fund, now known as Old-Age and Survivors Insurance (OASI) trust fund. Benefits are paid out from this fund to workers who have reached retirement age. The original payroll tax was 2% in 1937 (DeWitt 2010). Today the tax is 12.4%, which is split evenly between the employer and employee. Legislative amendments have expanded the program to provide disability and survivor benefits, which is a critical aspect of Social Security but not the subject of this paper. We will focus on the retirement benefits that are provided to insure American elderly against poverty. Today, 97% of the elderly population (ages 60-89) receives or will receive income from Social Security (“Policy Basics: Top Ten Facts about Social Security” 2020). Over the 86-year history of the program, the monthly benefits have grown from an average of $22.71 in 1940 to $1,543 in January 2021 (SSA; Martin and Weaver 2005).
- How is Social Security Funded?
Social Security is the most expensive federal program. In 2019, $902.8 billion of the program’s total $1.1 trillion spending was paid out in retirement benefits to 54.1 million OASI beneficiaries (OASDI Trustees Report 2020). To explain how a program this large is funded annually, we highlight three key features of Social Security’s unique funding activity: Social Security funding is self-contained or “outside” the federal budget process; it’s a pay-as-you-go (PAYGO) program, and its structure is regressive.
President Roosevelt designed Social Security as self-contained, separate from the federal government budgets (Dewitt 2012). This self-funding system is insulated from federal budget decisions that vary administration by administration, assuring the American public that they could depend on income from Social Security in retirement. Ultimately, Social Security is insurance earned by participating in the American labor force.
Social Security is funded primarily through a dedicated payroll tax (FICA). Employees and their employers each pay 6.2% of earned income up to the taxable maximum. In the case of self-employment, workers pay the total tax of 12.4% (Social Security Administration 2020). While employers pay their share with any other taxes they owe, FICA is automatically withheld from every employee’s paycheck—When Rachel Green from Friends receives her first paycheck, she famously laments, “Who is FICA and why is he getting all my money?!” (“The One with George Stephanopoulos” 1994).
Incoming revenue from FICA taxes is used to pay the scheduled benefits of current retirees for that year, which is a PAYGO system. In 2019, $805.1 billion was collected in payroll taxes for retirement benefits (OASDI Trustees Report 2020). In the same way, today’s retiring generation of baby boomers paid FICA taxes to pay for the retirement benefits of the generations before them (Peterson Foundation 2020). The tax revenue is paid out to beneficiaries through two trust funds: the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds. These trust funds are designed to cover current benefit costs when taxes are insufficient. The Social Security Administration may have to dip into the reserve from time-to-time; but when the economy is in a boom, FICA taxes are expected to make up that difference so the system stays in actuarial balance. Additionally, income taxes on benefits and some Medicare insurance taxes contribute to the OASI trust fund. In 2019, $34.9 billion was collected from taxes on OASI benefits. Ultimately, 89% Social Security is funded by FICA payroll taxes (Fichtner and Finke 2020; OASDI Trustees Report 2020).
Excess revenues can arise when the amount of FICA taxes collected exceed the amount necessary to pay scheduled benefits. These excesses remain in the trust fund as a reserve invested in special U.S. Treasury securities. The interest rate on these securities is an average of market yield on all interest-bearing securities from the U.S. federal government longer than 4-years maturity. More importantly, this interest stays in the OASI trust fund. Excess revenues depend on the tax rate, demographic characteristics, economic conditions, and established benefits. Thus revenues can vary widely year to year.
The last time FICA payroll tax was increased was in 1983 under President Reagan, who built up necessary reserves to $2.7 trillion in anticipation of the baby boomers retiring (Dewitt 2010). Beginning in 2020, however, the cost of benefits has exceeded payroll tax revenue. Benefits are being paid with the money held in reserves, resulting in a drawdown of the trust fund (Peterson Foundation 2020). Important to note is that under a PAYGO system, this impending depletion of reserves typically places the burden on the next generation to pay the deficit rather than cut benefits. This is called the “intergenerational wealth transfer” from younger to older generations (Blahous 2020).
Lastly, the funding of this social insurance program is regressive. Low-wage laborers end up paying a higher portion of their income towards FICA than high-wage earners. The FICA tax is a flat rate of 12.4%, meaning it does not change proportionate to one’s earnings like income taxes. Additionally, the FICA tax only applies up to a cap of $142,800 in 2021, so wealthy Americans are not subject to paying the same percentage of their yearly income as lower-income workers. A flat tax rate allows high-income earners to keep a higher portion of their income. Additionally, more disposable income increases the possibility of saving for their retirement. Social Security, however, is not like a pension in which the individual amount a worker contributes to the fund is equal to the amount one receives in benefits.
- How are Benefits Calculated?
While the funding of Social Security is regressive, benefits are intended to be distributed progressively. The benefit calculation is exceedingly complicated, and the average American does not fully understand how the formula works, least of all younger generations, which it arguably impacts the most. Benefits are meant to be equitable in that it rewards people who contribute to the program through paying FICA payroll taxes over their working lives. It is also designed to be socially adequate by returning a higher portion of what low-wage workers paid into the program than high-wage workers (Foster 2001).
To show how Social Security insurance is both equitable and socially adequate, we will walk through the process of calculating benefits. The amount of benefits a retired worker receives is based primarily on their lifetime earnings. When a retiree decides to collect Social Security benefits, there is a four-step process to calculate how much they will receive.
First, an average indexed monthly earnings (AIME) is determined by taking a worker’s highest 35 years of earnings up to the taxable maximum or benefit base, which is currently $142,800 (Social Security Administration 2020). The earnings are indexed to growth in national average wages to reflect better the change in general wages over the lifetime of the worker. This helps adjust for the rise in the cost of living over the worker’s employee tenure. The top 35 years of adjusted earnings are summed and divided by the number of months in those years and rounded to the nearest dollar. The result is the AIME of that particular worker (Social Security Administration 2020).
Next, a Primary Insurance Amount (PIA) is calculated to determine what percentage of AIME will be covered by Social Security. Currently, there are two bend points: one at AIME of $996 and the other at $6,002. Bend points work such that the percentage of monthly income returned “bends” at these points. Old-age and survivor insurance covers 90% of AIME up to $996, and 32% from $996 to $6,002, and 15% above $6,002 (Social Security Administration). In absolute terms, a high-income earner will receive a larger Social Security benefit, but a low-wage worker will receive benefits that reflect a higher portion of what they earned and paid in FICA taxes (Foster 2001).
The third step is adjusting benefits for what age the retiree begins collecting. The full retirement age (FRA) or normal retirement age (NRA) is 67 in 2021. The FRA has been increasing from 65 on a schedule since 2000 under the 1983 reform to reflect the increase in overall life expectancy. Once a person claims benefits, they will be paid Social Security insurance for the rest of their life. While the earliest a person can claim benefits is 62, the longer a retiree can wait to collect, the more they can receive in monthly payments. As we discuss later, this disadvantages Black Americans as existing health disparities and uneven access to financial resources force many to claim benefits earlier. Approximately an 8% credit is applied for every year that a person delays retirement from 62 to 70. As shown in the table below, for someone born 1960 or later, if they decide to claim social security at 62, then benefits are reduced to 70% of the PIA calculated in the previous step. If someone can hold off retirement until 70, then benefits increase to 124% of the PIA (Social Security Administration 2020).
For example, say someone retires at the FRA of 67, and their AIME is $7,002 (or an adjusted annual of $84,024). The PIA for this worker would be 996*0.90 + 5006*0.32 + 1000*0.15 = $2648.32 rounded to the nearest dollar the worker would receive $2,648 each month (or about $31,776 annually). These bend points make benefits progressive because the lowest earners have more of their income covered by Social Security insurance (Social Security Administration 2020). If this person collected at 62, they would receive $1,854 per month (or $22,248 annually), and if they were able to hold off to 70, they would receive $3,310 per month (or $39,720 annually) (Social Security Administration 2020). It makes intuitive sense that someone who holds off collection should receive more because their payout period is expected to be shorter.
TABLE 2: Effect of Early or Delayed Retirement on Retirement Benefits
|Benefit, as a percentage of PIA, for people born 1960 or later, beginning at age—|
|70||75||80||86 2⁄3||93 1⁄3||100||124|
The final step is adjusting benefits for inflation. This is a unique feature of the Social Security program and an expensive one. While benefits before 62 are indexed to wage increases, after a retiree claims their benefit, they are indexed to price increases. A cost-of-living adjustment (COLA) is applied each year to make sure income distributed approximately accommodates the rising cost of goods and services. The COLA is measured annually using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), commonly used in other federal calculations of COLA. The most recent COLA adjustment was a 1.3% increase (Social Security Administration 2020).
One other consideration is that some Social Security benefits are taxed for high-income households, effectively reducing their benefits. If an individual has an annual income between $25,000 and $34,000, up to 50% of their benefits may be taxed. For an individual earning above $34,000, 85% of their benefits are taxed. Revenue from benefit taxes goes back into the OASI fund (Social Security Administration 2020).
- Private Annuities vs. Social Security
One way to demonstrate the value of Social Security is to compare it to a private annuity. In general, private annuities are purchased with an upfront payment called a premium. Then, monthly benefits are calculated based on the age and sex of the individual(s) and the interest rate at the time of the purchase. Annuities ensure that a retiree will not outlive their savings by pooling mortality risk across a broader range of people. Actuaries consider that some annuity holders will die without receiving all the money put into the system. That excess money is used to pay those people who live longer than expected. Social Security essentially operates as a life annuity.
Social Security and private annuities both provide lifelong income subject to demographic and economic assumptions. One key distinction is that Social Security benefits are calculated for everyone using the same assumptions about life expectancy, while private annuities will make more specific assumptions about the individual who buys the annuity (Kintzel 2017). For example, private annuities will pay lower monthly benefits to women than men because women on average live longer.
While Social Security fully indexes benefits each year to inflation, only some private annuities are inflation-protected (Kintzel 2017). Those annuities are more expensive or have lower monthly payouts. Unlike Social Security, an annuity that provides joint and survivor (JS) benefits if the purchaser dies is more expensive (Kintzel 2017). Under Social Security, spousal and survivor benefits are earned, not purchased, through participation in the labor market.
Table 3 shows estimates of how much an inflation-protected private annuity would cost to match the average monthly Social Security benefit in 2014—$1,317 for men and $1,033 for women (Kintzel 2017). For a woman who retires at age 65, a joint and survivor, the inflation-protected annuity would cost her $367,338, which is much higher than the median household balance for workplace retirement savings in that same year (Kintzel 2017).
TABLE 3: Premiums for annuities with monthly payments equal to the average Social Security retirement benefit, December 2014 (in dollars)
Due to the selection bias of annuity purchases, annuities are costly. While annuities ensure that a retiree will not outlive savings, they are less beneficial for people who expect to live shorter life spans. Therefore, only people who expect to live a long time will purchase an annuity. Similarly, evidence suggests that Americans do not purchase annuities at the optimal price; many opt to withdraw their savings as needed, making annuities more expensive (Kintzel 2017).
IV. What is the current financial state of the program?
The Social Security Board of Trustees reports annually on the state of financial solvency for the OASI fund. The most recent Social Security Trustee Report states that without policy intervention based on the scheduled benefits, current payroll estimates, and the amount of OASI reserves that the trust fund will be depleted by 2035 (OASDI Trustees Report 2020). It is estimated that in 2035 only 79% of scheduled benefits will be payable. This fact is demonstrated in the overall actuarial deficit of the program, which is the current calculation of the future ability to pay benefits for the next 75 years (OASDI Trustees Report 2020). In 2020, the 75-year actuarial deficit increased from 2.67% of taxable payroll to 3.14% because of changes in assumptions about reduced inflation, lower fertility, lower real interest rates on OASI assets, and reduced disability incidences (OASDI Trustees Report 2020). Two significant assumptions affect the solvency of the program—demographics and economic conditions.
Life expectancy among baby boomers was expected to be higher than previous generations; meanwhile, birth rates are dropping. The ratio between workers contributing to the program and benefiting retirees has decreased from 42:1 in 1945 to 2.8:1 in 2015 (“The State of Social Security” 2021). These demographic shifts put stress on the PAYGO system as the population size of younger generations—such as generation X, millennials, and generation Z—is smaller than older generations in America. As the ratio between workers and beneficiaries decreases, revenue from payroll taxes will soon not be sufficient to pay for the current retirement benefits.
While demographics drive the imbalance in the system, economic conditions play a role as well. Unanticipated economic shocks, namely the Great Recession, have reduced the revenue coming into the system. Growth in real wages has declined in the past decades (Hanna and Stone 2020). Although decreased wages will eventually mean fewer benefits need to be paid, the resulting lower expected tax revenue for the current beneficiaries means that scheduled benefits will not be paid. The actuarial stress of the Social Security system will likely be intensified by the impact of COVID-19 (Hanna and Stone 2020).
Other less critical conditions that affect the system’s solvency demonstrate its complexity — for example, the repeal of the Affordable Care Act (ACA) tax on employer-sponsored group health insurance plans. Employer-provided health insurance premiums are not taxable under FICA, so increasing the employer compensation towards health insurance and away from wages decreases payroll taxes (OASDI Trustees Report 2020). In addition, over the past decades, average interest rates on U.S. federal securities have been decreasing. The assets of the OASI trust fund return less yield than in previous years. Since payroll taxes primarily fund the program, the effect of lower interest rates is modest (Hanna and Stone 2020).
Because Social Security is designed to be outside the federal government’s normal budget process, there is no easy way to reallocate money to the system by drawing from general tax funds or increasing government borrowing, as is the case for other federal programs. Restoring actuarial balance to the program will need to come from an act of Congress that may involve raising revenue through taxes and/or changing benefits (Hanna and Stone 2020).
Raising revenue will come from increasing FICA tax, earnings on trust fund assets, or taxes on benefits. Raising the dedicated payroll taxes either involves raising the tax rate (12.4%), raising the tax cap ($142,800), or increasing the scope of what is taxed. Revenue could also be raised by increasing the working-age population through immigration, although this would also involve paying out more benefits in the future. Additionally, the program could achieve actuarial balance through cutting benefits—whether for all beneficiaries across the board or specific groups such as high-income earners. Benefits could also be reduced by increasing the FRA (67), encouraging laborers to increase their employee tenure, and decreasing their retirement time (Hanna and Stone 2020).
The American Academy of Actuaries estimates that to pay out full scheduled benefits the FICA tax rate needs to increase by 3.14% immediately—totaling a 15.54% payroll tax—20% higher than the current rate (“An Actuarial Perspective on the 2020 Social Security Trustees Report” 2020). On the other hand, if the tax rate were to stay the same, benefits would need to be immediately reduced by 19% to keep the system in balance over the next 75 years (Hanna and Stone 2020). Many reforms involve some combination of these two approaches and applying changes to different subsets of the workers or beneficiaries. The longer Congress waits to implement provisions, the more extreme the policy action will need to be to ensure solvency.
The American Academy of Actuaries estimates that in order to pay out full scheduled benefits the FICA tax rate needs to immediately increase by 3.14%—totaling a 15.54% payroll tax—20% higher than the current rate (“An Actuarial Perspective on the 2020 Social Security Trustees Report” 2020). On the other hand, if the tax rate were to stay the same, benefits would need to be immediately reduced by 19% to keep the system in balance over the next 75 years (Hanna and Stone 2020). Many reforms involve some combination of these two approaches as well as applying changes to different subsets of the workers or beneficiaries. The longer Congress waits to implement provisions, the more extreme the policy action will need to be in order to ensure solvency.
It has been 38 years since the last time Social Security was successfully reformed (DeWitt 2010). Considering that older generations tend to be the most politically active, Social Security is sometimes referred to as the “third rail of American politics” because any changes may outrage this important voter group. However, change is necessary and pertinent to the well-being of the American elderly. If benefits are reduced, it will disproportionately impact Black Americans, who rely more heavily on Social Security income. Similarly, any increase in payroll taxes will further decrease the disposable income of those with low wages. Furthermore, it will have a significant intergenerational effect on the national economy, placing the burden of the program’s uncontrollable growth on younger generations (Blahous 2020). The most important thing to note is that the sooner provisions are enacted, the less severe the required changes will be.
Literature Review: The Importance of Social Security for Black Americans
Many scholars have written on the state of retirement wealth for Black Americans and the crucial role that Social Security has in equalizing the wealth gap in old age. Social Security impacts the existing wealth disparity between Black and white households. In this section, we review distinguished papers in the analysis of the racial impact of the social insurance program.
- Urban Institute, “African American Economic Security and the Role of Social Security,” Kilolo Kijakazi, Karen E. Smith, and Charmaine Runes (2019)
Social Security has reduced more poverty than any other government program (Kijakazi et al. 2019). Due to the reality of the financial insecurity plaguing Black Americans today, Black seniors are twice as likely as white seniors to be below 100% of the federal poverty level (Kijakazi et al. 2019). Contributing to the racial wealth gap in old age is that Black families are less likely to have retirement accounts than white families (Bhutta et al. 2020). Disparities in pension income and other financial assets stem from systematic barriers that Black Americans face in the labor market, prohibiting many from receiving jobs that offer pension plans. For further context, Black Americans are more likely to work in the service sector than management, professional, or related sectors that are more likely to offer retirement benefits through their employer (Kijakazi et al. 2019). Additionally, Black Americans are less likely to take up a retirement savings plan such as an IRA (Bhutta et al. 2020).
Other labor market barriers that contribute to insufficient retirement funds include reduced likelihood of having job tenure, increased likelihood to face unemployment, and increased likelihood of working part-time (Kijakazi et al. 2019). These differences are true at every level of education and present in every occupation, suggesting that racial disparities in earnings and uneven access to retirement planning are partly due to discrimination against Black Americans in hiring, pay, and employment (Kijakazi et al. 2019). As a result of the structural racism in the labor market, Black Americans are less financially secure in retirement, which further indicates the importance and need for Social Security income for this vulnerable population.
Black Americans use Social Security differently from white Americans. Black beneficiaries tend to collect benefits much earlier than the general population of beneficiaries. Black workers and their families are much more likely to collect Social Security Disability Insurance than white workers, partly due to the higher likelihood of exposure to hazardous or physically demanding occupations, particularly among Black men. Black Americans experience a higher rate of injury and illness than white workers. This disparity is exacerbated by the healthcare disparities between Black and white Americans. Black families are more likely to receive survivor benefits because Black Americans have shorter life expectancies and are more likely to die prematurely (Kijakazi et al. 2019).
The Urban Institute explicitly mentions that Social Security is critical for Black women, who have longer lifespans, more caregiving responsibilities, and lower lifetime earnings than their male counterparts (Johnson 2020). Black women are more likely to be financially insecure, facing higher poverty rates than Black men in America. While Black women have a higher labor force participation rate, they face labor market barriers based on both race and gender and, for that reason, are much more likely to face poverty in old age than their white counterparts. Additionally, Black women face more involuntary unemployment or under-employment at every education level (Kijakazi et al. 2019).
- National Association for the Advancement of Colored People (NAACP), “Viewing Social Security through a Civil Rights Lens,” Derrick Johnson (2020)
Social Security provides an essential backstop for Black Americans against persistent economic inequality (Johnson 2020). In his opinion piece on Social Security, NAACP President Derrick Johnson sheds light on just how essential Social Security is for Black Americans. Johnson addresses the apparent racial wealth gap in the U.S. today and cites that older Black Americans have lower lifetime earnings, smaller private retirement savings, less access to pension benefits, and, as a consequence, are more dependent on Social Security than white households (Johnson 2020). Nevertheless, Black families still benefit less from the program because of the structural barriers in place for Black income earners.
Johnson then shifts his focus to the solvency and reform policy issue of the social insurance program. Though he denounced the program’s earliest decades due to the structural exclusion of the majority of Black Americans, Johnson refers to Social Security as “critical for African Americans who have fewer resources and become disabled at higher rates” (Johnson 2020). He cites the program’s benefit structure as the main reason for this reality: “In 2017, 35 percent of married older African Americans and 58 percent of unmarried older African Americans received 90 percent or more of their income from Social Security” (Johnson 2020). This large-scale dependency on the program causes any reform proposal to unfairly impact Black Americans, which Johnson mentions with examples such as President Donald Trump vowing to cut payroll taxes, which would reduce the progressive benefit payments. Finally, Johnson notes that COVID-19 effects will most definitely intensify the racial significance of the social insurance program. In August of 2020, “fewer than half of Black adults [had] a job” (Johnson 2020). Also, small businesses owned by Black Americans have been closing at twice the rate of white-owned small businesses (Johnson 2020). Wealth safeguards families from economic shocks, but Black families have fewer emergency funds and may have to dip prematurely into their retirement savings, if even applicable, to cushion the loss of income from the pandemic-related recession (Moss et al. 2020).
- Mercatus Research Center, “An Analytical Framework for Strengthening Social Security,” Charles Blahous (2020)
American retirement security expert Charles Blahous published a comprehensive study on Social Security that articulates the program’s uncontrollable growth has real-world effects that work against some of the policy intentions. The program’s current framework “assumes that as American society grows richer over time, dependence on Social Security should grow rather than lessen” (Blahous 2020, 25). The conservative thinker challenges this notion, wary that the uncontrolled growth of the program will counterwork its purpose. Social Security redistributes some income from those who have more to those who have less (Blahous 2020, 1).
While the benefit formula is overall progressive, there are regressive aspects of the program growing with its costs and preventing Social Security from having progressive real-world effects. The cost growth rate of the program exceeds the growth rate of the economy resulting in an intergenerational legacy of debt (Blahous 2020, 23). Blahous outlines seven levers of Social Security that can be reformed to restore long-term actuarial balance and address regressive income redistribution. He warns against raising taxes without changing the benefit structure because future generations of young workers will be burdened with significantly more significant net income losses. In order to implement the most practical combination of provisions, Blahous recommends that reform plans “be analyzed to determine how they would change the poverty rates among beneficiaries; the marginal returns on work; and the net treatments of different generations, income levels, and other demographic groupings” (Blahous 2020, 66). While Blahous is primarily concerned with finding balance in the program funding and spending, his research suggests that any financial burden on workers and beneficiaries will disproportionately impact individuals of color.
- Boston College Center for Retirement Research, “Social Security is a Great Equalizer,” Wenliang Hou and Geoffrey T. Sanzenbacher (2020)
As discussed earlier, retirement wealth is not distributed evenly between racial groups (Hou and Sanzenbacher 2020). According to Geoffrey T. Sanzenbacher and the Boston College Retirement Research Center, white Americans accumulate over five times the amount of wealth Hispanic and Black Americans obtain (Hou and Sanzenbacher 2020). To conceptualize the monetary significance of Social Security benefits, Geoffrey Sanzenbacher and his colleagues at the Center for Retirement Research at Boston College found a sophisticated yet practical analysis of the retirement income stream. An expected present value (EPV) formula “to understand the extent different ethnic groups rely on Social Security” (Hou and Sanzenbacher 2020). As analyzed in detail earlier in the paper, the lifetime earnings difference between Black and white families causes significant inequality in retirement savings accounts and overall wealth accumulation. According to a Health and Retirement Study (HRS) survey, with the exclusion of Social Security, white middle-quintile, or the middle 50% income earners of each demographic group, at age 51-56, hold a 7.3:1 wealth ratio over Black households. This extreme wealth ratio at ages 51-56 is why “Social Security is [the] Great Equalizer” for Black Americans (Hou and Sanzenbacher 2020).
TABLE 4: Retirement Wealth (Excluding Social Security) at Ages 51-56 for Middle-Quintile Households within Race by Cohort, 2016 Dollars.
Given the 7:1 racial wealth ratio held by white Americans before retirement age, Sanzenbacher and the Center for Retirement Research at Boston College illustrate how “Social Security reduces retirement wealth inequality by race and ethnicity.” To calculate the importance of partial income replacement for Black Americans, the researchers use the EPV analysis to “convert the monthly income stream [of Social Security benefits] into a wealth measure” by relying on assumptions such as survival probabilities and prorated lifetime earnings projections (Sanzenbacher 2020). To satisfy the definition of the time value of money, not only did the original EPV take into account the discount of the income stream at age 65, but the analysis also “further discounted […] to the age of the [person at] the survey year” since the study group was 51-56. Fortunately, according to the Estimated Present Value of Social Security, the social insurance program does act as an equalizer in addition to a financial lifeline. Wealth for white Americans drops to around two times greater than minorities for middle quintile households.
Table 5: Retirement Wealth (Including Social Security) at Ages 51-56 for Middle-Quintile household within Race by Cohort, 2016 Dollars
This seismic shift of wealth disparity seen in the table above was the exact reason for implementing the social insurance program in 1935. Social Security’s benefit formula helps level the economic playing field for low and middle-income earners in retirement. Due to the harsh reality that “the typical Black household earns […] just 59 cents for every dollar” a white household earns, the progressive structure of Social Security significantly impacts minority households (Beyer 2020). As mentioned earlier, Social Security does have progressive attributes. Given the significance of Social Security based on the EPV analysis, Sanzenbacher suggests “it may be worth considering the effect of any potential changes on the distribution of wealth” (Sanzenbacher 2020). These types of considerations and the work performed by The Center for Retirement Research at Boston College define forming policy through an antiracist lens.
Reform Proposals: Balancing Benefits, Revenues, and Politics
As we have already discussed, Social Security reform is necessary to address the imminent depletion of the trust fund’s reserves, estimated to be 2035. There has been much debate over how to bring solvency to the Social Security imbalance in recent decades, including numerous proposals from inside and outside Congress on fixing Social Security. The debate centers around balancing benefit adequacy or providing a level of income so that retirees can live in dignity; and benefit equity or finding an equilibrium for the amount each beneficiary paid into the FICA system and what they will receive (Foster 2001). Some proposals favor increasing the revenue collected and benefits to create actuarial balance and ensure that low-income beneficiaries can live in some form of a dignified retirement. Other reform proposals focus their attention on maintaining the current tax system by making benefits more progressive and increasing the retirement age to create an actuarial balance (Kijakazi et al. 2019).
The last significant amendments were enacted in 1983, and these reforms were made shortly before automatic benefits cuts would have taken effect. The amendments increased both the FICA payroll tax contribution rate and the retirement age. Though Social Security has remained a topic of debate in American politics, reform without an immediate solvency solution seemed bleak. In 2010, President Obama created the bipartisan Bowles-Simpson commission to look at Fiscal Responsibility and Reform, including Social Security. Ultimately, it failed to achieve the supermajority of its members required to submit its recommendations to Congress. More progressive members opposed raising the full retirement age and potentially reducing benefits for those who need it most; more conservative members pushed against raising the FICA tax contribution rate. Like most Social Security debates, the commission and its recommendations essentially went nowhere. However, there is a reason for hope as the current administration understands time is of the essence, with a multitude of projections predicting the depletion of funds by the early next decade. Given that the recently elected Democratic President Joseph Biden included a significant reform proposal in his 2020 campaign, we anticipate Congressional action to be taken within the next decade.
Since 2000, 148 proposals have been submitted to the Office of the Chief Actuary. Moreover, every year, the Chief Actuary analyzes each reform’s actuarial impact. To simplify the Social Security reform conversation, we review three mainstream proposals, each embodying a specific Social Security reform method.
- First is from Congressman John Larson (D, CT), who is the current Chairman of the Subcommittee on Social Security within the House Ways and Means Committee. Chairman Larson’s Bill, entitled Social Security 2100, was originally introduced in the House in 2019 and had more than 200 co-sponsors in the House—all Democrats. We are viewing Chairman Larson’s bill as the Democratic-endorsed proposal.
- Next is the late former Congressman Sam Johnson (R, TX), who through 2018 was Chairman of the Subcommittee on Social Security and acting Chairman of the Ways and Means Committee. Congressman Johnson’s bill, entitled The Social Security Reform Act of 2016, was introduced in the House in December 2016. Although this bill did not have co-sponsors, it has been viewed as the Republican Party’s reform proposal.
- Last, the Bipartisan Policy Center (BPC) published a proposal in the Report of the Commission on Retirement Security and Personal Savings in June 2016 (BPC 2016). The Commission was led by former Senator Kent Conrad (D, ND) and James B. Lockhart III, Former Principal Deputy Commissioner of the Social Security Administration. Given the ideological divide on this matter, the Bipartisan Policy Center attempts to integrate some of the principles of each political party’s reform solution. The BPC proposal is commonly viewed as a bipartisan proposal and contains elements of both the Democratic and Republican proposals.
I. Social Security 2100
The Social Security 2100 Act is the most recent democratic-endorsed reform proposal to improve the program’s solvency and benefits. Since economic forecasts project the social insurance program to be unable to pay full benefits by 2035 or earlier, Congressman Larson’s bill implements two major tax renovations to fund benefit increases and improve the program’s actuarial balance. According to the Chief Actuary, Chairman Larson’s bill achieves actuarial balance for the Social Security OASI Trust Fund over the 75-year examination period, and beyond.
Figure 2: Current Law and Proposal OASDI Trust Fund Reserves as Percent of Annual Cost: 2019 TR Intermediate Assumptions,
Source: Chief Actuary 2019
As evidenced by the figure above, Social Security 2100 achieves the goal of establishing an actuarial balance by raising additional revenues. Chairman Larson’s perspective is that “millionaires and billionaires [should] pay the same [effective] rate as everyone else (Larson 2019). Enactment of the eight provisions under Social Security 2100 would change the long-range OASDI actuarial deficit from 2.78% of taxable payroll to a positive actuarial balance of 0.39% of payroll (Goss 2019).
Increase in the Income Cap
As of 2021, FICA payroll tax collection stops at the income cap of $142,800. To cover more earned income, Chairman Larson proposes a “donut-hole” style cap applying the FICA payroll tax to all income over $400,000 and the tax on income under the current income cap of $142,800. This proposal creates a “donut hole” in that FICA taxes will not be paid on income between $142,800 and $400,000 (Larson 2019). Larson’s proposal would apply the tax to the top 0.4% of wage earners (Larson 2019). It is important to point out that the income cap increases each year based on the national average wage index (Goss 2019).
Furthermore, in Social Security 2100, the $400,000 amount above which FICA payroll taxes are to be collected does not increase. Therefore, the “donut hole” will slowly decrease in size until the income cap no longer exists, and all income is subject to FICA’s payroll tax. According to the Chief Actuary’s analysis of the provision, the creation of the “donut-hole” would reduce the long-range OASDI actuarial deficit by 1.93% of annual taxable payroll (Goss 2019).
Increases in the FICA Tax Rate
Social Security 2100 suggests a gradual increase in the FICA contribution rate. In Larson’s plan, by the year 2043, all workers and employers will pay a combined 14.8% of all earned income (Larson 2019). This is a 20% increase in the tax rate or a 2.4% increase over the current rate of 12.4%. The new rate of 14.8% would apply to all earned income, as described in the prior section. According to the Chief Actuary, this singular provision would substantially reduce the actuarial deficit by 1.87% of taxable payroll (Goss 2019).
It is important to note that this provision has fallen victim to most, if not all, GOP lawmakers who argue that raising the tax disproportionately affects millennials and lower-income individuals (Radelat 2019). John Larson, however, would argue on the contrary. He states that the increased revenue is not only necessary to achieve actuarial balance, but to fund additional “social adequacy” of benefits, as described below. Larson’s team has coined the phrase “less than a latte” a week for the program to provide both more significant benefits for low-income workers and ensure long-term solvency (Larson 2019).
With more FICA tax revenue to support the social insurance program, Larson shifts his focus to the progressive aspect of Social Security. Larson emphasizes the importance of increasing benefits and making them more progressive to achieve more significant equity and social adequacy.
In his proposal, Chairman Larson suggests across-the-board benefits increase by increasing “the first factor of the PIA (Primary Insurance Amount) formula from 90 to 93 percent” (Goss 2019). An increase in the first bend point percentage (up to $926 of AIME in 2019) would positively impact all beneficiaries and produce an even more significant financial effect on low-income families (Larson 2019). The Chief Actuary estimates this benefit provision to increase the long-range OASDI actuarial deficit by 0.24 percent of taxable payroll (Goss 2019).
Guaranteed Minimum Benefit (GMB)
A new guaranteed minimum benefit is necessary to prevent poverty-ridden old-age among low earners in retirement. Social Security 2100 established a new GMB, which is “equal to 125 percent of the federal poverty level (FPL) for a single adult” annually (Johnson and Smith 2020). FPL is the annual poverty guideline measured by the Department of Health and Human Services, and it increases each year by the AWI faster than inflation (Larson; Johnsons and Smith 2020). However, the full GMB would only be available to workers with at least 30 years of employment. The Urban Institute reports that workers will need to earn at least $6,280 annually to qualify for the full GMB, which is estimated to be $17,399 annually in 2023 under Chairman Larson’s plan (Johnson and Smith 2020). Social Security 2100 would increase the minimum benefit amount for beneficiaries with at least 11 years of covered employment, increasing to the full GMB after that with each additional year of employment (Johnson and Smith 2020). The Chief Actuary estimates this stabilizing provision would increase the long-range OASDI actuarial deficit by 0.15% of taxable payroll (Goss 2019).
Income Tax on Benefits
Charman Larson proposes replacing the current thresholds for federal income taxation of OASDI benefits to fixed values of $50,000 for single filers and $100,000 for joint filers in 2020 (Gross 2019; Johnson and Smith 2020). The Chief Actuary estimates this provision will increase the long-range OASDI actuarial deficit by 0.14% of taxable payroll (Gross 2019).
COLA Changes to CPI-E
Larson also suggests the COLA mirror the spending habits of a retiree and the growing prices of modern medicine. As of now, the Social Security Administration tracks the cost of living adjustments for benefits by using the Consumer Price Index for Wage Earners and Clerical Workers (CPI-W) (Goss 2019). In his proposal, Larson suggests that with the modernization of medicine and the rising costs of old-age, the SSA should change which index it monitors. The act does so by measuring the CPI-E (Consumer Price Index-Elderly) and adjusting the benefits accordingly (Larson 2019). The Chief Actuary projects that this change would increase the long-range actuarial deficit by 0.41% of taxable payroll (Goss 2019).
With improved benefits and significant provisions to the FICA tax system, Chairman Larson and Social Security 2100 most definitely addresses Social Security’s pressing solvency issue, all while addressing the program’s progressive attributes to provide greater social adequacy.
II. The Social Security Reform Act of 2016
Congressman Johnson’s proposed bill, The Social Security Reform Act of 2016, remains one of the prominent Republican Social Security plans. In essence, the bill achieves actuarial balance by reducing aggregate benefits—but making them more progressive—and not raising tax revenues. While Congressman Johnson’s reform, which would take effect in 2023, anticipates overall benefits to fall for the program to return to long-term actuarial balance, these reductions would primarily affect high-income beneficiaries (Johnson and Smith 2020). Consequently, reducing the program’s spending would improve the solvency of the program. Most notably, the Social Security Reform Act of 2016 does not increase the regressive FICA tax or income cap, demonstrating that long-run actuarial balance can be achieved without changing the payroll tax revenue. Congressman Johnson’s proposal is under the assumption that funds will be depleted by 2034. If all fifteen provisions are enacted, the long-range OASDI actuarial deficit would change from 2.66% of taxable payroll to a positive actuarial balance of 0.02% (Goss 2016). Below we explore the most significant provisions under the Social Security Reform Act of 2016.
Figure 3: Current Law and Proposal OASDI Trust Fund Reserves as Percent of Annual Cost: 2016 TR Intermediate Assumptions,
Source: Chief Actuary 2016
To account for the rising life expectancy and increasing cost of Social Security, various reforms have proposed increasing the full retirement age (FRA). President Ronald Reagan implemented a gradual increase in the FRA from 65 to 67 beginning in 2000 (DeWitt 2010). While the current FRA has yet to reach 67, the Social Security Reform Act of 2016 has recommended increasing the FRA further to 69, reducing benefits for those who collect, especially Americans that collect early. The enactment of this provision alone would decrease the long-range actuarial deficit by 0.84% of taxable payroll.
More Progressive Benefit Formula
Congressman Johnson suggested recalculating benefits to redistribute income from high-income beneficiaries to low-income beneficiaries. He first recommends replacing the existing two PIA bend points with three bend points equal to 25%, 100%, and 125% of the national average wage index (AWI). This allows for higher benefit percentages for workers with average index earnings below 90% of AWI. Urban Institute reports that this provision “would shift benefits from higher-income people to lower-income people by increasing the benefit formula’s replacement rate for the first dollars earned by a worker; reducing the replacement rate for higher earnings; and creating a new, meager replacement rate for the highest earnings” (Johnson and Smith 2020). Thus, Congressman Johnson’s plan makes benefits more progressive through redistributing retirement income. According to the Chief Actuarial Report on Johnson’s plan, this would decrease the long-range actuarial deficit by 0.85% of taxable payroll (Goss 2016).
The Social Security Reform Act of 2016 also introduces using an annualized mini-PIA to adjust benefits. Instead of averaging a worker’s highest 35 years of adjusted AIME and calculating one PIA using bend points, Johnson’s plan would compute an annual PIA “ by applying the formula to a worker’s AIME each year, adding those benefit amounts for a worker’s top 35 highest-earning years and dividing the sum by 35” (Johnson and Smith 2020). Using an average annual PIA in the formula would ensure benefits calculations are entirely progressive (Johnson and Smith 2020). This change would enable the system to distinguish between high-income beneficiaries with few years of employment would receive lower benefits than low-income beneficiaries that have worked for many years (Johnson and Smith 2020). The Chief Actuarial Report estimates that this provision will reduce the long-range actuarial deficit by 0.34% of taxable payroll (Goss 2016).
Congressman Johnson’s bill proposes to compute the COLA using the chain-weighted version of the Consumer Price Index for All Urban Consumers (C-CPI-U) for beneficiaries whose modified adjusted gross income (MAGI) is below $85,000 ($170,000 if filed jointly) for the prior tax year. Unlike the current CPI-W, C-CPI-U better accounts for consumer’s behavior when prices change and do not overstate actual inflation. Using a chained CPI will decrease the COLA increases significantly, which helps balance the revenue. Using the C-CPI-U would reduce how much benefits increase each year, significantly decreasing the COLA. While this provision alone would reduce the purchasing power of elderly Americans, in combination with changing the benefits formula and raising the minimum benefit, the benefit amounts would effectively prevent poverty in old age.
Additionally, Congressman Johnson recommends providing no COLA for beneficiaries whose MAGI is above this threshold. High-income beneficiaries would receive a constant amount of benefits over time. The Chief Actuary estimates that implementation of this provision alone would reduce the long-range actuarial deficit by 1.25% of taxable payroll (Goss 2016).
Eliminate Tax on Benefits
Congressman Johnson proposes to gradually increase the combined income threshold beginning in 2045 to phase out the federal income tax on Social Security benefits by 2054 (Goss 2016). This provision would effectively increase benefits amounts for retirees. The Chief Actuary reports that this provision alone would increase the long-range actuarial deficit by 0.40% of taxable payroll (Goss 2016).
Raising Minimum Benefit
The Social Security Reform Act of 2016 similarly intends to establish a new minimum benefit, which Johnson explains would be set “equal to 35 percent of the national average wage index two years before initial benefits eligibility, or $20,399 annually in 2023, for beneficiaries with at least 35 years of covered employment” (Johnson and Smith 2020). This plan will prorate the minimum benefit for retirees with less than 11 years of experience, but it will increase after that with years of covered employment (Johnson and Smith 2020). Consequently, very low-income beneficiaries with less than 35 years of experience will not be eligible for the full minimum benefit. Urban Institute reports, “In 2023, workers would need to earn at least $12,559 annually to qualify for a year of employment under Johnson’s plan” (Johnson and Smith 2020). As the AWI increases over time, so will this eligibility threshold. The Chief Actuary estimates that enacting this provision would increase the long-range actuarial deficit by 0.23% of taxable payroll (Goss 2016).
Limiting Spousal Benefits
Currently, spouses receive 50% of beneficiaries’ Social Security income, accommodating families that can afford to have one spouse stay at home while the other works. The Social Security Reform Act of 2016 proposes an additional cap on benefits at 50% of the PIA assigned to a hypothetical worker with earnings equal to the AWI each year (Johnsons and Smith 2020). Congressman Johnson’s plan would base spousal benefits on a measure of the average worker, which is more progressive than tying one’s spousal benefits to their spouse’s high earnings. The Chief Actuary estimates that enactment of this provision alone would reduce the long-range actuarial deficit by 0.07% of taxable payroll (Goss 2016).
With improvements to the benefit formula, the Social Security Reform Act of 2016 slows the program’s growth rate cost considerably, allowing Social Security to return to long-term actuarial balance. Congressman Johnson’s reform makes adjustments to benefit Black, and low-income beneficiaries would see more comprehensive benefits if they can wait to collect at the FRA of 69. While Congressman Johnson’s reform will make Social Security more progressive, American laborers may not be able to work long enough to see it.
The Bipartisan Policy Center’s (BPC) proposal from 2016 is the basis of what real change from Congress will most likely look like (Kijakazi et al. 2019). The Bipartisan Policy Center created a report highlighting fundamental changes that would ensure actuarial balance, enhance benefits of the most vulnerable populations, reduce poverty among elderly Americans, improve late in life work incentives, and maintain the balance of tax burden on workers.
According to the Chief Actuarial Report, under the BPC proposal, the program would be fully solvent through the 75-year projection and pay 100% of scheduled benefits based on assumptions from the 2016 board of trustees report (Goss 2016). If all twelve of the provisions suggested in the BPC proposal were enacted, the actuarial deficit would reduce to 0.11% of taxable payroll. Over the 75-year period, 56% of improvement on actuarial balance resulted from increases in revenues, and 44% comes from reducing costs (Goss 2016).
Figure 4: Current Law and Proposal OASDI Trust Fund Reserves as Percent of Annual Cost: 2016 TR Intermediate Assumptions.
Source: Chief Actuary 2016
Given that any successful implementation of Social Security provisions will require bipartisan support, we examine the main provisions of the BPC’s proposal, which combines elements of Congressmen Larson’s and Johnson’s bills. Additionally, we offer an antiracism analysis for each of the BPC’s provisions.
- Shared Proposals
Bend Point Adjustments. All three proposals include increasing the progressivity of the PIA formula by either adding a bend point or increasing the PIA factor for low-income earners. BPC recommends adding a bend point to the benefit formula between the current bend points at the 50th percentile AIME for retired workers at its enactment. The PIA factors would change from 90, 32, and 15% to 95, 32, 15, and 5% (BPC). The BPC plan also suggests raising the first bend point and indexing the new bend point by the average national wage. The effect of this provision would reduce the long-range OASDI actuarial deficit by 0.04 percent (Goss 2016).
Adding a bend point or increasing the PIA factor would increase payments to Black Americans and reduce payments to white beneficiaries and college graduates (Johnson and Smith 2020). The suggested changes to the PIA calculations will increase allow Black Americans to receive a higher portion of what they put into the system and reward workers with longer career spans.
- Republican Leaning Proposals
Annualized mini-PIA. Rather than applying a PIA formula to an AIME, BPC proposes an annual PIA calculated using the replacement rate formula to each year of a worker’s earnings. This change provides better benefits for people with long working lives and looks more like a private pension plan. BPC suggests applying the benefit formula annually to earnings to more evenly rewarding continued work (BPC). The enactment of this progressive provision would be phased in over five years and reduce the long-range OASDI actuarial deficit by 0.23% of taxable payroll (Goss 2016).
Increasing the FRA from 67 to 69. The Bipartisan Policy Center suggests indexing the retirement age to longevity to account for the rising life expectancy. In addition, the maximum age for delayed retirement credits would increase from 70 to 72. While raising the FRA would reduce the long-range OASDI actuarial deficit by 0.5%, it would negatively impact Americans that will continue to collect early (Goss 2016). Urban Institute estimates that the poverty level among Black seniors would increase by about one percentage point (Kijakazi et al. 2019). This longevity-driven provision does not consider the existing healthcare disparities that disproportionately affect the well-being and life expectancies of Black Americans.
Using a chained-CPI-U for COLA calculation. BPC also suggests changing the measurement for COLA to change index to the chained-weighted version of Consumer Price Index of Urban consumers (C-CPI-U), which better accounts for consumer’s behavior when prices change. The currently used CPI-W may overstate actual inflation because consumers substitute away from goods when prices increase. Using a chained CPI will decrease the COLA increases significantly, which helps balance the revenue (BPC 2016). This would reduce the long-range OASDI actuarial deficit by 0.47% (Goss 2016). Using the C-CPI-U would significantly reduce how much benefits increase each year. Although this would positively impact the actuarial deficit by reducing costs, it would reduce the purchasing power for retirees when benefits are already too low for our most vulnerable elderly. The proponents of this change argue that inflation estimates are overstating felt price increases, but this might not be the case for the retirees who spend their income on healthcare, a service that cannot be substituted.
Limiting Spousal Benefits. The BPC suggests capping spousal benefits at the 75th percentile, effectively means-testing spousal benefits. This provision would primarily reduce additional benefits distributed to the spouses of high-income beneficiaries (Kijakazi et al. 2019).
Making spousal benefits more equitable improves the progressivity of benefits and increases revenue (BPC). Capping spousal benefits would reduce the long-range OASDI actuarial deficit by 0.11 percent (Goss 2016).
- Democrat Leaning Proposals
Increasing the Taxable Maximum. BPC suggests raising the taxable maximum and indexing the future maximum to the national average wage index (AWI). They suggest a linear increase over four years. Then after it would increase by AWI plus 0.5 percent points higher than current law (Goss 2016), this increase would reduce the long-range OASDI actuarial deficit by 0.56% (Goss 2016). Due to the unfortunate reality that significantly more white wage earners are in the top 1% (most of the demographic being affected), increasing the taxable maximum in the FICA system is exceptionally beneficial to Black Americans. With additional funds from the top wage earners, benefits, which are progressive, have a higher likelihood of being paid in totality or even increased over time (Larson 2019).
Increasing payroll tax rate. BPC proposal recommends increasing the payroll tax rate from 12.4% to 13.4%. They suggest increasing the rate by 0.1 every year over ten years. As previously articulated, increasing the FICA tax would decrease the disposable income of low earners and Black Americans. While this provision would reduce the long-range OASDI actuarial deficit by 0.88%, it would harm the Black-white wealth gap (Goss 2016).
Increasing tax rate on benefits for certain beneficiaries. BPC proposes increasing taxes on benefits for individuals earning greater than $250,000 and households earning greater than $500,000 so that they could be taxed on 100 percent of their benefits. This would increase the progressivity of benefits but has a modest effect on the actuarial deficit—only reducing the long-range OASDI actuarial deficit by 0.01 (Goss 2016).
Basic Minimum Benefit. The BPC suggests creating a basic minimum benefit tied to the poverty line. The BMB would increase indexed by the AWI, so for someone already receiving the BMB, their benefits would increase by more than the COLA in years when the AWI is greater than the C-CPI-U, which is generally the case (Goss 2016). Unlike other provisions, creating a BMB would increase the long-range OASDI actuarial deficit by 0.19% (Goss 2016). Despite the negative effect on the deficit, the other provisions more than make up the difference.
The BPC’s suggestion is to create a basic minimum benefit (BMB) where beneficiaries with the lowest Social Security benefits would be supplemented when they reach full retirement. Those with the lowest AIME would receive the highest BMB. The BMB calculation also takes into account the number of working years. The BMB is also means-tested to avoid giving benefits to those with low lifetime earnings but high income from other sources such as inheritance. Beneficiaries above a certain income will also have to repair their BMB through income taxes (Kijakazi et al. 2019). A basic minimum benefit would be funded from Supplemental Security Insurance (SSI) and would replace SSI funds dollar-for-dollar to save the federal government money. The BMB would be automatically applied, which is better than the current system through the SSI. In 2002, 40% of those eligible for supplemental security insurance did not apply for it. Automatic application of BMB in Social Security benefits would reach more eligible beneficiaries and help reduce the risk of poverty among the most vulnerable populations (Kijakazi et al. 2019).
Urban Institute estimates that the implementation of BMB would reduce the Social Security income gap by race for the bottom income quintile of Black seniors and white seniors by 2065 (Kijakazi et al. 2019). A BMB would increase benefits at a faster rate for low-income Black Americans than low-income white Americans. Black Americans in the bottom income quintile can expect to see their benefits rise by 23%, while white Americans’ benefits would rise by 18%. The Chief Actuary Report estimates that the Bipartition Policy Center’s BMB policy would add 0.19% of taxable payroll to Social Security’s long-term deficit of 2.78% of taxable payroll (Kijakazi et al. 2019).
Social Security is not an entitlement program or a forced individual savings account. Its primary goal is to ensure all American workers receive an adequate income in retirement. Social Security provides better benefits at a lower cost than private retirement accounts and provides crucial income for the elderly who otherwise would live in poverty. The imminent depletion of funds by 2035 necessitates Congressional action. Returning to long-term actuarial balance of the system will require a combination of raising revenue and reducing costs. Immediate and gradual reform is desirable. The longer Congress does not act, the more severe necessary actions will be.
Reforming Social Security to address the growing actuarial deficit has political implications—which is why Congress has not done it yet. Elderly Americans are among the most politically active. Any reform proposal is under extreme scrutiny from interest groups—particularly the AARP, which has 38 million members over the age of 50, 95% of whom vote (Haker). Young people do not have a voice in Congress the way older Americans do, so if we do not pay close attention to reform, the program’s legacy of intergenerational debt will shift to us.
As Congress debates Social Security reforms over the next few years, it should consider the impact each provision will have on Black retirees, the program’s most reliant and vulnerable users. Current proposals that reduce costs may disproportionately impact Black elderly. For example, raising the retirement age to account for increased life expectancy negatively affects Black Americans who have shorter life expectancies, face healthcare disparities, and are more likely to collect benefits early for financial reasons. Reform provisions have the potential to either decrease or increase the racial retirement wealth gap.
The program can return to a long-range actuarial balance without disproportionately cutting benefits to Black retirees or decreasing the disposable income of Black workers. With its large budget and near-universal coverage, Social Security as the great equalizer can further reduce the racial wealth gap in old age. For racial groups to stand on equal footing in retirement, the benefit formula needs to be more progressive so that retirement income is redistributed from those with more to those with less. Across the political spectrum, reformers recognize the need for strengthening benefits for lower-income retirees.
In addition to improving the progressivity of the benefit structure, there are regressive components of Social Security, growing with the program’s costs and counteracting the progressive intent, which require Congress’s attention. Whether the regressivity is reduced or eliminated entirely depends on the implemented provisions; however, each would decrease OASI long-range actuarial deficit. The disproportionate economic impact of the COVID-19 pandemic further underscored the growing racial wealth inequality in the United States (Moss et. al 2020). To not reform Social Security through an antiracist lens may further exacerbate that exact inequity.
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