Partial Privatization of Social Security: Assessing Its Effect on Women, Minorities, and Lower-Income Workers (2000)

Once viewed as the “third rail” of politics, Social Security appears to be moving inexorably toward reform. In his 1998 State of the Union address, President Clinton proclaimed strengthening Social Security a high priority and called for bipartisan forums on Social Security reform to be held throughout the United States. Similarly, following the 1998 November elections, congressional leaders expressed commitment to “saving Society Security,” and House Ways and Means Chairman Bill Archer renewed his commitment to bipartisan reform of Social Security as recently as December 8, 1999 in a letter to President Clinton. Congressional hearings on reform proposals are ubiquitous, and discussions regarding Social Security and its possible reform flood the popular press.\nWhile reform proposals vary, proposals to privatize the system partially; that is, to provide some, but not all, benefits through pre-funded individual accounts, are among the most popular of the reform proposals. Often differing in detail, the partial privatization proposals typically share a number of common elements. First, like the current system, most partial privatization proposals require that workers contribute some portion of their earnings to finance their Social Security benefits. Most partial privatization proposals then require that some portion of these contributions be used to fund individual accounts, and that workers invest those individual accounts in one or more private funds. Finally, most proposals provide workers with two tiers of benefits. The first tier benefit may consist of a flat benefit that all workers receive regardless of their earnings or, like the current system, the first tier benefit may be based in part on earnings, but provide a greater return on lower wages than on higher wages. The second tier benefit consists of the contributions to the individual account and any earnings or losses thereon.\nThis Article explains why partial privatization would likely have a disproportionately adverse effect on the benefits of three specific subpopulations: women, minorities, and lower-income workers. The Article focuses on these three groups principally because they are at a heightened risk of poverty in old age. Since one of the fundamental purposes of Social Security is to provide for progressive redistribution to lift the elderly out of poverty, policymakers should be (and are) concerned with how Social Security reform would likely affect these subpopulations. Of course, not all women and minorities are at heightened risk of poverty in old age. To the extent that members of these groups are not at a heightened risk of poverty in old age, public policy may not dictate that Social Security reform accord them any special protection. Nevertheless, policymakers should still be aware of any disparate impact Social Security reform may have on these groups. Accordingly, this Article analyzes how partial privatization would likely affect the benefits of all three subpopulations, regardless of whether they face a heightened risk of poverty in old age. For ease of reference, this Article will refer to the three subpopulations as “at-risk” or “more vulnerable” even though individual members of the groups may not face a higher risk of poverty.\nThe Article begins by explaining how partial privatization differs fundamentally from the current system. The Article then explains why partial privatization would likely have an adverse effect on the benefits of women, minorities, an lower-income workers. Specifically, it explains why shifting investment risk to workers, the fundamental indispensable difference between the current system and a partially privatized system, would likely have an adverse impact on the benefits of the three at-risk groups. It then explains how distribution of benefits of the three subpopulations would be impacted by partial privatization’s interaction with the four factors – (1) payout of benefits, (2) progressive benefit formula, (3) disability benefits, and (4) auxiliary benefits – most relevant in determining how the current system redistributes income. The Article does not analyze any single partial privatization proposal, although it does refer to specific proposals when relevant.