Social Security Reform – Individual Accounts Would Reduce Disability Benefits

Four years ago, Access Press reported on the likely effects of “privatization”of Social Security on that program’s disability benefits (see […]

Four years ago, Access Press reported on the likely effects of “privatization”of Social Security on that program’s disability benefits (see “Social Security and Disability: What Privatization Means” August 1997). In that article, we pointed out that any plans to “privatize” Social Security which means to take some of the money that currently goes into a pool that covers everybody and shift it into private accounts that belong to individuals would necessarily involve deep cuts in the disability insurance benefits now paid by the program. That’s still true, and that’s the bad news.

The good news is that many people are coming to understand that so-called privatization would be a bad deal for people with disabilities (and others) and are making their voices heard. Back in 1997, Access Press was one of the few places in the country that was talking about the likely effects of Social Security “reform” on disability benefits. Now many groups and organizations have done the math, and they are coming up with similar results.

We predicted in our previous article that the debate about the privatization of Social Security would reach “a fever pitch in the next few years.” Four years later, we see that it has. This past May President George W. Bush appointed a “Commission to Strengthen Social Security,” and directly charged it with the job of coming up with a plan to partially “privatize” the Social Security program. So it seems like a good time to take a look at the issue once again.

More Than a Retirement Program

Despite many people’s perception that Social Security is simply a government-run retirement program, it is far more than that, as readers of Access Press well know. Twelve percent of all Social Security recipients in 1997 some 5.4 million people were collecting the program’s disability benefits because they were themselves disabled or were the children of disabled workers. Social Security’s disability coverage is the equivalent of a $203,000 policy in the private market. Such policies “are either unavailable in the private market or very expensive,” according to a recent report published by The Century Foundation and the Economic Policy Institute.

In addition, more than 90 percent of the adult disabled children who receive Social Security benefits do not receive disability benefits, but receive survivors benefits, because they are dependents of deceased or retired workers, according to the federal government’s General Accounting Office (GAO). When we factor in survivors benefits, we see that Social Security is both a large disability and a large life insurance program. Program-wide, about a third of Social Security expenditures pay for survivorship and disability benefits.

Social Security Disability Insurance (SSDI) pays monthly benefits to workers who are no longer able to work due to a severe illness or impairment that is expected to result in death or to last at least12 months. Benefits are based on the disabled worker’s past earnings and are paid to the disabled worker and his or her dependent family members.

There are racial, gender, and age factors to consider when thinking about the effects of privatization on Social Security’s disability and survivors benefits. African American workers as a group, for example, have lower lifetime wages, are more likely to hold high-risk jobs, and have a shorter life expectancy than European-American workers. As a result, African Americans are major beneficiaries of Social Security’s disability and survivors insurance programs. While African-Americans make up just 12% of the nation’s population, they constitute 18% of disability beneficiaries. Fifteen percent of the under-18 population is African American, yet they constitute 22.6% of all young survivorship beneficiaries and 20.8% of young disability beneficiaries.

Many more women than men are dependent on their spouse’s income for much of their lives, and women live longer, on average, than men. This explains why women, who make up 52% of the population, constitute 72.3% of survivorship beneficiaries. And children under the age of 18 just 6% of the population constitute 26.9% of survivorship beneficiaries and 22.1% of disability beneficiaries.

The Basic Problem

The basic problem with the concept of individual accounts in regard to disability and survivors benefits was stated clearly in a 1999 report from the Leadership Council of Aging Organizations, which said, “Today, workers who become disabled or die can rely on Social Security for a basic income for themselves and/or their families. This is true even for younger workers who have not had many years to pay into the system. But if Social Security were replaced with a private accounts plan, workers who face death or disability would be forced to rely primarily on their own investments for income. If they are young and have not had sufficient time to accumulate funds in their personal accounts, they could be putting their families in serious jeopardy.”

In January 2001, the General Accounting Office released a report entitled “Social Security Reform: Potential Effects on SSA’s Disability Programs and Beneficiaries.” That report, prepared at the request of Iowa Senator Tom Harkin, looked at five different proposals to “reform” Social Security, including four proposals that would include significant aspects of the “individual accounts” approach favored by President Bush. As the GAO pointed out, in each case “the reform proposals would reduce insurance benefits while creating individual accounts, with the expectation that the income from an individual account would largely offset reductions in the insurance benefits.” The report found that not to be the case, however, saying, “In our estimates, the income from the individual account was not sufficient to compensate for the decline in the insurance benefits that disabled beneficiaries would receive.” These were their findings despite the fact that, throughout their investigation, the GAO assumed an “optimal set of conditions for disabled beneficiaries.” In other words, even the GAO’s “best case” scenario shows a reduction in disability benefits under the President’s preferred approach to Social Security “reform.”

This problem (which the Leadership Council points out “is a critical issue which has been largely ignored by proponents of privatization”) has been noted and duly reported in many other studies done by a variety of organizations over the past few years.

The details of exactly how benefits are reduced are fully explained in the GAO report, and include such techniques as changing the indexing formulas for setting benefits, reducing the inflation adjustment, and changing the benefit computation period.

Other, Related, Problems

The risk of individual accounts lowering the value of disability benefits would fall hardest on those with low incomes, for two reasons. First of all, the current system redistributes income from the richer to the poorer by use of a formula which replaces a higher percentage of lost wages for low-income workers than for high income workers. This redistributive effect would be completely lost with individual accounts. Secondly, low-income workers would have less money in each paycheck than high-income workers so, logically, they would have less money to take out and put into their private accounts. This would affect disabled workers disproportionately since, as the Social Security Administration (SSA) points out, “The overall poverty rate for disabled workers is much higher than that for others aged 18-64.”

Here are some other facts from the SSA:

Among families of disabled workers, the overall poverty rate is 18% compared with 9% for others aged 18-64.

A higher proportion of disabled workers are considered “near poor,” with income between poverty and 125 percent of poverty, than others aged 18-64 (14% compared with 4%).

About one-third of disabled workers are poor or near poor compared with only 13% of others aged 18-64.

(Some other sub-groups in the population who have very high proportions of poor or near poor, according to the Social Security Administration, include: “black non-Hispanics,”at 51%, “persons under age 40,” at 43%, and “non-married women,” at 51%.)

This problem the lowering of benefits to those who need them the most is fundamental and unavoidable under an individual accounts plan, but there is another problem with the idea that goes beyond arithmetic and is worth thinking about.

The American Social Security system as we know it, like most Social Security systems around the world, is based on the principle of social insurance. That is, everyone shares the costs (by way of paying taxes) in order to support a program that protects anyone who may suffer a loss of income due to death, disability, or retirement. This is the “social” in Social Security. Furthermore, everyone who pays in is guaranteed to receive benefits that are related to their lost wages. This is the “security” in Social Security.

All of the plans to set up personal accounts attack this principle by taking money out of the common pool and putting it into the hands of individuals. Thus, it is guaranteed that, rather than providing security for all, a system of individual accounts would produce not only “winners” but also “losers.” This is because each worker would receive benefits only from their own investments, the value of which could be affected for better or worse by any number of factors that have nothing to do with need. These factors include luck, good connections, experience with investments, education, and a variety of other factors. President Bush has ordered that the President’s Commission to Strengthen Social Security “must include individually controlled, voluntary personal retirement accounts.” The Commission has thus been instructed to begin to replace “Social Security” with a new system that is neither social nor secure. Each member of the President’s “bipartisan” Commission agrees with this approach to “reforming” the system.

I have provided a lot of (possibly confusing) statistics in this report on Social Security “reform,” but the bottom line should not be at all confusing to readers of Access Press: Any plan to “save” or “fix” Social Security that includes individual accounts will reduce benefits for recipients of Social Security Disability Insurance. Readers may want to contact their elected representatives, and the President, and tell them what you think about that.

For those who want more information than is contained in this article, addresses for some excellent Social Security – related web sites appears in the sidebar accompanying this article.

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