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January 28, 2005

Consider A Few Facts About African Americans and Social Security

By and

Paul Krugman becomes more irresponsible and shrill with each new column. His January 28 column, "Little Black Lies," reaches a new low.

 

In it, he blasts a pioneering seven-year-old study by The Heritage Foundation that compared the amount of Social Security taxes that Americans pay with the amount that they receive in benefits.[1] That report showed Social Security to be a bad deal for most Americans, especially African Americans. Krugman cites a 1998 memo from Social Security Administration actuary Steve Goss criticizing some aspects of the methodology that we used and leaps to the conclusion our study is nothing but "damned lies." He then accuses President Bush of taking the higher death rate for African Americans for granted, stating that "But the claim that blacks get a bad deal from Social Security is false. And Mr. Bush's use of that false argument is doubly shameful, because he's exploiting the tragedy of high black mortality for political gain instead of treating it as a problem we should solve."

 

Let's put the rhetoric aside, and concentrate on facts.

 

We answered Goss's critique (and others) long ago, in our December 11, 1998, report "Social Security's Rate of Return: A Reply to Our Critics."[2] This paper has been available on our website for many years now and proves that we did account for Social Security's progressive retirement benefits formula, as well as disability and survivor benefits and other elements of the program that disproportionately benefit minorities.

 

In short, we used the same benefit formula that Social Security uses to calculate retirement benefits for our study. We included the cost of a life insurance policy that duplicates the survivors benefits offered by Social Security. Most importantly, we treat disability benefits as a separate program from the retirement and survivors benefit program that we studied.

 

Indeed, we went so far as to rerun the numbers using an alternate methodology suggested by Goss and found that it reinforced our initial finding that African Americans generally receive a far lesser return on their "investment" of Social Security taxes than whites.

 

Disability benefits are not included in our study for a good reason: Social Security's Disability Insurance (DI) benefits are administered through a separate program that has its own tax (0.9 percent of income from both the employer and employee), its own trust fund, and its own procedures for determining eligibility. It is a true insurance program, while Social Security's retirement income program has the characteristics of a pension plan. The only real overlap is that both programs currently use the same formula for calculating benefits, and we have been calling for that to be separated for several years. We feel completely justified in leaving this program out of the analysis of the larger Social Security program since any plan to fix Social Security's retirement program should leave the disability program just as it is.

 

A major factor in African Americans' poor returns from Social Security is the sad fact that so many black workers die before they can receive significant benefits. When measured in terms of the proportion of a worker's pre-retirement income that is paid in Social Security benefits, all lower income workers receive more than higher income workers do. However, they often receive these benefits for a shorter period of time. 

 

Krugman tries desperately to minimize, even dismiss, this problem. "Blacks' low life expectancy is largely due to high death rates in childhood and young adulthood," he assures us, before noting that the typical African-American male who makes it to retirement age can expect to collect benefits for only two years less than his white counterpart.

 

However, the difference between receiving benefits for 14.6 years instead of a white worker's 16.6 years is 12 percent. A 12 percent "cut" may be no big deal to Krugman, but it often determines whether workers realize a net gain or loss from Social Security.

 

A more appropriate way to look at this problem is reflected in a National Center for Health Statistics report, which shows that one-fifth of white men die between the ages of 50 and 70. These workers have paid a lifetime of Social Security taxes into the system, but at best only receive retirement benefits for a few years. The same study shows that fully one-third of African-American men will die between the ages of 50 and 70. Contrary to what Krugman claims, the difference in Social Security rates of return between African Americans and whites is not primarily due to high death rates in childhood and young adulthood.

 

The one area where Krugman is correct is that this situation is a national tragedy and that correcting the health problems that causes the difference in life expectancies should be a national priority-but not as part of a bill that would save Social Security's retirement income benefits.

 

Rather than acknowledge and consider the inconvenient facts, Krugman resorts to base name-calling. Those who would reform the system to give Americans-and especially African Americans-a better return on their investment and the ability to amass a nest egg that can be passed on to their heirs are charged with "playing the race card" and bigotry. 

 

Paul Krugman was once a respected academic, but sadly, he now stoops to produce superficial and poorly researched propaganda. Krugman's January 28 attack is no more than an artfully executed piece of propaganda; Only when one examines the facts behind his charges does its veneer of reason shatter.

 

David John is Research Fellow in Social Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies, and William W. Beach is Director of the Center for Data Analysis, at The Heritage Foundation.



[1] See William W. Beach and Gareth G. Davis, "Social Security's Rate of Return," Heritage Foundation Center for Data Analysis Report No. 98-01.

[2] See William W. Beach and Gareth G. Davis, "Social Security's Rate of Return: A Reply to Our Critics," Heritage Foundation Center for Data Analysis Report No. 98-08.

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