When I think about Social Security, I think about MacGyver. You know, the 1980s heartthrob who could defuse a bomb with a paperclip. (The show has even been rebooted) Bear with me. Time and time again, MacGyver would wait until the very last second to stave off disaster. With one second left on the clock, he would wiggle a wire, preventing some giant explosion. You know, sort of like how the U.S. treats the Social Security Trust Fund. The last amendments to the program to ensure its solvency were passed in April 1983, three months before its Trust Fund was to run out.
Well, the clock is ticking again. If nothing is done, the Social Security Trustees estimate that by 2034, the Trust Fund will be depleted. When that happens, the program will continue to function, but benefits will be cut by more than 20 percent. This reduction would obviously be a problem for the whopping one quarter of seniors who receive almost all of their income from the program. But it also has implications for an issue that has been gaining attention in the wake of COVID-19 — the racial wealth gap.
By any measure, the racial wealth gap is extreme. For example, using survey data from 2019, researchers at the Federal Reserve report that the median Black household had 15 percent the wealth of the median white one. In technical terms, wealth is ridiculously unequal.
While these survey-based analyses are valuable, they usually miss an important source of wealth — Social Security. The problem is that many people think of Social Security not as a source of wealth, but as a source of income. Maybe they should go annuity shopping. For a single male at age 65 to buy an annuity that pays $1,500 a month for life — roughly the average Social Security benefit — it would take about $300,000 of wealth.
And, according to research by myself and Wenliang Hou, the exclusion of Social Security is important. Our calculations focused on the wealth of people ages 51-56, i.e., approaching retirement. Excluding Social Security, the typical Black household had $24,300 wealth, with $176,900 for the typical White household. That ratio of 14 percent was similar to other survey-based measures. When we add Social Security, those same numbers become $172,000 and $377,800 for Black households and white ones, respectively. That 14 percent Black-to-white ratio? It increases to 46 percent. That’s over a three-fold increase — but 46 percent is still not good.
The reason for this increase in relative wealth is that Social Security is fairly equally distributed, for two reasons. First, Social Security is nearly universal for employed people. By comparison, employer-sponsored plans are less available for Black workers. Second, Social Security benefits are progressive, i.e., the program replaces a larger share of lower-income people’s income. Since Black households still make less than 60 percent what white households make, this feature of Social Security reduces inequality. This progressivity stands in contrast to 401(k)-type retirement plans. In these voluntary plans, higher-income people are more likely to be able to afford to contribute, meaning these plans can exaggerate income inequality.
The thing is that many bipartisan approaches to addressing Social Security’s funding shortfall consider benefit reductions. And, without proper consideration, those benefit reductions can sometimes be unintentionally regressive — they can hurt lower-income workers the most.
For example, consider something as seemingly neutral as an increase in the full retirement age (FRA) from 67 to 69. This increase is actually a benefit cut — anyone who doesn’t move back their retirement date would see their benefits cut by roughly 13 percent. Black workers are less likely to be able to respond with delay, because their jobs are more likely to be highly or moderately physical, impeding longer careers. So, the increase in the FRA is regressive.
Which gets me back to that ticking bomb. Right now, every financial services company seems to have a plan to lessen the racial wealth gap. But maybe we should … you know … fix the existing program that does so much to lessen the wealth gap. The longer we wait, the less likely we are to be able to carefully consider a combination of revenue increases and benefit cuts that maintains one of Social Security’s most important features — it’s progressivity. Worse, the more likely we are to let the clock run out. The resulting explosion will only worsen an incredibly unequal part of American life.
Geoffrey Sanzenbacher is an associate professor of the practice at Boston College and a research fellow at the Center for Retirement Research at Boston College.