Paul Krugman tackles the subject of race and Social Security with his accustomed blend of civility and honesty, calling the President a bigot and misrepresenting key parts of the debate.
This week, in a closed meeting with African-Americans, Mr. Bush asserted that Social Security was a bad deal for their race, repeating his earlier claim that "African-American males die sooner than other males do, which means the system is inherently unfair to a certain group of people." In other words, blacks don't live long enough to collect their fair share of benefits.
This isn't a new argument; privatizers have been making it for years. 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 start with the facts. Mr. Bush's argument goes back at least seven years, to a report issued by the Heritage Foundation - a report so badly misleading that the deputy chief actuary (now the chief actuary) of the Social Security Administration wrote a memo pointing out "major errors in the methodology." That's actuary-speak for "damned lies."
We noted some of this in the preceding post; here is a summary of the SSA response, as well as a reply from the Heritage authors. We should add that the racial angle to personal accounts was noted in the 2001 Bush Commission final report, so go scream at Moynihan.
Now, here comes Krugman's first misrepresentation:
In fact, the actuary said, "careful research reflecting actual work histories for workers by race indicate that the nonwhite population actually enjoys the same or better expected rates of return from Social Security" as whites.
Really? That was the actuary summarizing a backward looking study, since the excerpt continues with an admonition to "See Duggan, et. al., "The Returns Paid to Early Social Security Cohorts," Contemporary Policy Issues, (October), pp. 1-13." Here is a good summary of the discussion prepared by the AARP (which also mentions Duggan). The gist - once the disability component is factored in, blacks have done roughly as well as whites with Social Security.
But the privatizers aren't talking about changing the disability part of the plan, now are they? In fact, as the Times reported, it is far from clear how disability might be changed, if at all, if personal accounts are adopted. So if we limit ourselves to what the President was actually talking about, which was the Social Security retirement plan, the lower life expectancy of blacks reduces their return.
In any case, the Social Security actuary had a bit more to say about this, which Prof. Krugman must have overlooked:
...with proper adjustment with mortality by income level, race differentials in life expectancy would diminish greatly, for individuals at the same income levels.
Without appropriate adjustment of mortality by income, race-differentials in rates of return are highly misleading. This is the reason that the Office of the Chief Actuary, Social Security Administration has not as yet developed race-specific money's worth ratios or rates of return.
I will grant that race may be an important proxy for income and marital status (a point made by the AARP summary), so that in a more elaborate analysis, the independent effect of race might be quite small. However, as of 1998, the Chief Actuary had not actually done the analysis.
How do these race-based subtleties fare in Krugman's explanation? Not well:
Here's why. First, Mr. Bush's remarks on African-Americans perpetuate a crude misunderstanding about what life expectancy means. It's true that the current life expectancy for black males at birth is only 68.8 years - but that doesn't mean that a black man who has worked all his life can expect to die after collecting only a few years' worth of Social Security benefits. Blacks' low life expectancy is largely due to high death rates in childhood and young adulthood. African-American men who make it to age 65 can expect to live, and collect benefits, for an additional 14.6 years - not that far short of the 16.6-year figure for white men.
Yes, the life-expectancy at birth is not useful. However, the life-expectancy at age 65 is also misleading, since it overlooks the many folks who pay taxes for a lifetime and then die before retirement. The reduced life expectancy of black males at age 20 (who have survived the childhood issues and can now look forward to a lifetime of Social Security taxes) is also relevant - at age 20, the gap relative to white males is about 5 years. [MORE: Jim Glass is, as usual, quite insightful on this point. Clearly, I let Krugman off easy on this.]
Second, the formula determining Social Security benefits is progressive: it provides more benefits, as a percentage of earnings, to low-income workers than to high-income workers. Since African-Americans are paid much less, on average, than whites, this works to their advantage.
True, but... is Social Security progressive? The program combines a regressive payroll tax on the front with a progressive benefits scheme at the back. On net, is it progressive?
And I will tell you why I wonder. Normally, to compare cash flows at different points in time economists use a discount rate. Since the cash flows in Social Security come from the government, one might discount them using a risk free government rate. However, the risk free rate scarcely represents the opportunity cost of funds of a low-income worker - someone who is maxed out on their 18% credit card, paying 12% on a car loan, and is getting red-lined for a home mortgage is probably not thinking about a risk-free rate of 3 to 5%.
On the other hand, for a high income worker who has sufficient savings to have accumulated some financial assets, discounting Social Security inflows and outflows at the rate associated with Treasury investments may be perfectly reasonable.
So, if the "right" discount rate falls as income rises, it may be the case that Social Security loses its progressivity. Has the research been done? Probably. Have I found it? Not yet...
Back to Krugman:
Finally, Social Security isn't just a retirement program; it's also a disability insurance program. And blacks are much more likely than whites to receive disability benefits.
True, but so what? Substituting inheritable personal accounts for a portion of the retirement benefit does not require a change in the disability benefit.
So the claim that Social Security is unfair to blacks is just false. And the fact that privatizers keep making that claim, after their calculations have repeatedly been shown to be wrong, is yet another indicator of the fundamental dishonesty of their sales pitch.
Hmm. My opinion is that deliberately mischaracterizing your opponent's position is fundamentally dishonest. None of the research suggests that the retirement component of Social Security is a good deal for blacks. From which it follows that a reform which adds personal accounts without reducing disability benefits should be good for blacks. (Fine, but is it fair to presume that *someone* must be getting less if blacks are getting more? Don't vex me.)
MORE: As you read through the Heritage back-and-forth, here is a personal challenge - see if you can refrain from laughing out loud when you see how the critics tackle the question of transition costs.
UPDATE: The Heritage folks respond to Krugman.