New Cato Study: Privatization Would Help Poor
December 12, 2001
In a new Cato Institute study, "The Impact of Social Security
Reform on Low-Income Workers," Federal Reserve Bank economist
Jagadeesh Gokhale shows that the lack of property and inheritance rights in the current program actually harms poor and minority
workers and helps maintain wealth disparities.
"As a result, the distribution of bequeathable wealth among
retirees in the United States is highly unequal," he writes. "In contrast,
a system of individual accounts would allow workers to accumulate
real and bequeathable wealth and would lead ultimately to greater
equality of wealth. Social Security privatization therefore becomes the
truly progressive option for reform—one that is most likely to benefit
the poor."
Many modest households—particularly minority households
and those with low education and earnings—currently save very little
and therefore own almost no financial wealth at retirement, Gokhale
explains.
"The poor are disproportionately dependent on Social Security,"
writes Gokhale. "The poorest 20 percent of the elderly, for example,
depend on Social Security for 81 percent of their retirement income,
while Social Security provides only 20 percent of retirement income
for the wealthiest fifth of retirees."
Nevertheless, according to Gokhale, Social Security’s financial
troubles are intractable and traditional reforms, such as raising taxes
or cutting benefits, will leave low-income workers worse off. "Allowing
workers to save and invest a portion of their Social Security taxes in
individual accounts may avoid or offset potential benefit cuts, without
increasing taxes," he says.
Social Security may also transmit this inequality across
generations, Gokhale says. "Because it generates an asymmetric
impact on retirement saving by low and high lifetime earners, Social
Security may be reducing or eliminating the inheritances of children in
poor households but not of those in rich households," he writes. "In
turn, this may reinforce the chance that the children of the poor, in
contrast to the rich, themselves arrive at retirement with low levels of
bequeathable wealth."
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