Washington, DC -- A new report by the U.S. Congress Joint Economic Committee finds that two central elements of the Social Security proposals put forth by Republican lawmakers—“privatization” and “progressive price indexing” —would result in benefit cuts for millions of middle-income workers, jeopardize the solvency of the Social Security Trust Fund and undermine the program’s ability to keep millions of Americans from living in poverty.
The report, “Unnecessary Risk: The Perils of Privatizing Social Security,” focused its analysis on recently revived Republican proposals to privatize the program by allowing future retirees to divert a portion of their payroll taxes to individual investment accounts.
“Privatizing Social Security jeopardizes the security in Social Security,” said Congresswoman Carolyn B. Maloney, Chair of the JEC. “This report highlights that it is unwise to look to the stock market for a guaranteed annuity. We all know all too well that the stock market is subject to wild swings. We cannot afford to roll the dice with our seniors’ retirement security.”
A key finding of the report is that with privatization, retirees will be subject to fluctuations in the performance of the stock market and overall returns will vary based on individual investment decisions, with significant swings in returns and account accumulations possible from year to year and even month to month.
- An annuity purchased by a worker who retired in 2008, after the Great Recession had begun and the stock market had collapsed, would replace only 40 percent of his final income, down from 87 percent replacement just two years earlier. For example, a worker expecting an annuity of $867 per month in 2006 would have received $399 per month if he retired in 2008.
- The report shows that in the post-World War II period, a worker’s annuity purchased at the time of retirement, after investing 7 percent of his earnings over a 40-year career, could replace as much as 156 percent of his final salary or as little as 36 percent, depending on which year the individual retired and purchased the annuity. (See chart below.)
The JEC report finds other significant problems with privatization:
- Allowing current contributors to divert funds out of the general Social Security Fund into private accounts will exacerbate the shortfall in revenues for current and future retirees as well as for current and future recipients of disability and survivors insurance.
- Private accounts are unlikely to provide a guaranteed retirement annuity, indexed for inflation, as the current Social Security system provides.
- Private accounts may encourage lower-income workers to borrow against retirement savings in order to provide food and education for their children.
- Lower-income households, women, African Americans and Hispanics would be hurt most by privatizing Social Security, since they depend more heavily on Social Security for their retirement income. For example, among adults 65 and over, Social Security accounts for 79 percent of income for the bottom income quintile while making up just 25 percent of income for the top quintile.
The JEC also looked at proposals to change the formula for calculating initial benefits, characterized as “progressive price indexing” and finds that changing from wage-indexing benefits to price-indexing benefits would result in benefit cuts for most retirees and would have a large impact on middle-class retirees who depend on Social Security for more than three-fourths of their income.
Finally, the JEC report found that without Social Security benefits, 46 percent of senior citizens would be living in poverty. With Social Security, the poverty rate for elderly Americans is 10 percent.
The role Social Security plays in reducing poverty is especially critical for women. Without Social Security, half of elderly women would be living below the poverty line; the benefits provided by Social Security reduce the poverty rate for women aged 65 and over to 12 percent.
Maloney said, “Without Social Security, almost half of our senior citizens would be living in poverty – an unthinkable thought. But Republican plans ignore the benefits of Social Security and instead place their chips on risky private accounts. This combined with the Republican’s proposed new formula for determining Social Security benefits could have a disastrous impact for the folks who depend most on today’s Social Security system – low and middle-income households, women and minorities.”
The Joint Economic
Committee, established under the Employment Act of 1946, was created by
Congress to review economic conditions and to analyze the effectiveness of