Social Security and Poverty

August 18, 2000

In the August 13 Orlando Sentinel, columnist Tait Trusell outlines some of the poverty-reduction claims made for Social Security, and questions whether a system of private accounts could do a better job:

The wife and I just retired here and started collecting our Social Security checks. So I’ve been reading up on it," said Mr. Lake County Retiree. "I’ve read that, without Social Security, nearly half the seniors would have incomes below the poverty level. It’s sure a great anti-poverty program for us old folks."

Well, Mr. Recent Retiree, it’s true that Social Security is a major income source for many seniors. But, ironically, Social Security actually can contribute to poverty among many seniors rather than relieving poverty.

"How could that be?" he said, looking amazed.

Most older folks naturally figure if there were no Social Security benefits, they’d have no other income. However, consider this: If Social Security had never been enacted, many people your age would still be working. Of course, not all seniors can work or even want to. But many do. Congress recently repealed the earnings test that penalized seniors who wanted to work. More seniors are working.

More important is whether Americans -- without Social Security to depend on -- would have saved more for retirement. You wouldn’t have had to pay any payroll taxes. You could have saved or invested that money. Payroll taxes have been raised 50 times to $4,724 maximum currently for an employee and $9,448 for someone who is self-employed.

"Yeah, but who says people would have saved more if there was no Social Security system?" Mr. Recent Retiree muttered skeptically.

Scholars at Harvard University and at the National Bureau of Economic Research found that Americans on average have reduced their private savings by nearly one dollar for every dollar of the present value of future Social Security benefits.

"Well, who believes a bunch of theory-spinning economists?"

Not everybody. But even Social Security’s researchers have conceded that a dollar of Social Security substitutes for most of a dollar of other assets you otherwise may have acquired. Even though many view Social Security as an anti-poverty program, there’s evidence it really hasn’t lived up to that label.

"What evidence?" he demanded.

Despite Social Security benefits, one in eight seniors still lives in poverty. In fact, the poverty rate among seniors remains higher than that for the general adult population, according to the Census Bureau.

For some people, the money shortage is much worse. For elderly women who have never married or for widows, one in five is at the poverty level and for divorced women and blacks, nearly 30 percent over age 65 have incomes below the poverty level, census figures show.

"I guess my wife and I are lucky to be getting what I understand is the average payment of $1,348 each month," Mr. Retiree remarked.

You are, compared to the worker earning the minimum wage over his working career. And there are quite a few like that in Lake County. They get only a little more than $6,000 a year in Social Security benefits, well below the poverty level of $8,204 for an individual and $11,060 for couples. Social Security alone won’t raise these people out of poverty.

"That’s very interesting. And suppose that guy who made minimum wage all his working career could have, instead, invested his payroll taxes in the private market. How much difference would that have made?"

Assuming the fellow invested in stocks earning average returns, he’d be getting retirement benefits of $20,700 a year, not $6,000, calculates Michael Tanner, who has written three books on government entitlements. In fact, 65 respected economists, including three Nobel Prize winners, have endorsed privatizing Social Security.

"Wow!"

Not only does Social Security contribute to poverty among some retired people, it can perpetuate poverty for future generations. A man can pay Social Security taxes all his life, die, and if his wife is older than 65, none of that tax money he paid goes to his heirs.

And that certainly is food for thought.

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