ldunbar@nul.org

Washington, DC, May 12, 2000–Without Social Security benefits, not only would there be more children living in poverty, their degree of poverty would be much greater, a report released today by the National Urban League reveals.

In an analysis of the overall effect of Social Security benefits on poverty rates for families with children, the National Urban League’s report, The Impact of Social Security On Child Poverty, reveals that Social Security lifts one million children out of poverty, and shifts another million children out of extreme poverty.

The impact was greatest on low income families. Because 66 percent of African American–compared with 31 percent of white–children live in low income families, and half as many more African American children are likely to be in families getting Social Security benefits, African American children experience a reduction in poverty that is almost four times the effect on white children, and three times the effect on Latino children.

"Arguments in the debate over Social Security privatization miss one very important mark: the impact of the program on those Americans who rely on survivor or disability benefits to supplement modest to meager incomes," said National Urban League President Hugh B. Price.

Founded in 1910, the National Urban League is a nonprofit organization whose 115 affiliates in 35 states and the District of Columbia provide direct services focused on empowering African-Americans to achieve economic, academic and racial equality. The League’s headquarters is located at 120 Wall Street in New York City.

Research and Public Policy Department

Washington, D.C.

May 2000

This research report, by Valerie Rawlston of the National Urban League’s Department of Research and Public Policy, highlights the complexities of the Social Security Program. Almost one million children are lifted out of poverty because of Social Security benefits, the report reveals. For families receiving Social Security benefits, this means a drop of 31 percent in child poverty for the poorest families, and 56 percent for lower middle income families. This is significant to the African American community because one-third of African Americans who get Social Security are children.

The Old Age, Survivors and Disability Insurance Program, Social Security’s formal name, is about more than Old Age. For purposes of clarity, OASD Insurance, as its full name implies, is an insurance program. The tax collected to support the program comes from the Federal Insurance Contribution Act. It can best be described as a life insurance product, with disability benefits indexed to inflation and family size, and an annuity fully indexed to inflation and marital status.

As this report highlights, OASD Insurance is very unique because it insures families. The benefits of the program are not just for the worker, but also for the worker’s dependents and spouse. That makes the program very complex, and difficult to assess, when viewed as only an annuity program for a worker. Calculations of private "rates of return" on the program miss that point, and remove both the "Social" and the "Security" aspects from the program.

Calculations that suggest a low rate of return on FICA taxes for African Americans also tend to misrepresent the nature of the lower life expectancy of African Americans. Differences in mortality between whites and African Americans, and hence life expectancy, are greatest for African Americans in their twenties and thirties. That set of workers has low earnings, and would accumulate very little value in individual accounts. Regretfully, those workers do leave behind families with children. Maintaining the insurance and family based benefit structure of the OASD Insurance program is vital for the fairness of the program to African Americans.

The broad based support for the program comes from the many ways it touches the lives of American families. For some families, it is in the receipt of disability benefits. For some it is in the receipt of dependent survivor benefits. For some, it is in the receipt of old age retirement benefits. A program which separated the treatment of retirement from the family insurance part of the program would not have such a universal family focus.

The Americans Discuss Social Security Project found that Americans overwhelmingly value most the social insurance aspects of the program, specifically disability and survivors’ benefits. So, the National Urban League’s concerns are the ones Americans, in general, have.

Director, Research and Public Policy

The National Urban League

While the majority of families with children do not receive Social Security, for many of those who do, the benefits are significant enough to prevent the family from slipping into poverty. The greatest impact is seen among families who are closer to the poverty threshold. This group consists mainly of those on the high end of the low income group, and the low end of the lower middle income group; the majority of whom are White families. While we find the greatest percentage of recipients is among White families with children in the first quintile, African-Americans have the highest concentration of recipients among second quintile families with children.

Despite the fact that nearly one million children were lifted out of poverty by Social Security in 1998, there remained still millions more who were not. However, in some cases where Social Security did not keep a family out of poverty, it was instrumental in keeping large numbers of people out of "extreme poverty." For our purposes, "extreme poverty" is defined as having an income of less than half the appropriate poverty threshold index. While the overall reduction in extreme poverty was relatively meager (2 to 3 percentage points), the subgroup of OSAKI recipients experienced reductions in extreme poverty ranging from 74% among Latino families to 80% among White and African-American families. Therefore, Social Security was not only successful at moving families on the margin completely out of poverty, but it also moved a number of families out of extreme poverty (i.e. above half the poverty threshold).

As discussions about how to strengthen Social Security continue, it would be wise to broaden the scope beyond retirees. Social Security is more than a retirement program, it’s a family insurance program. As this report has demonstrated Social Security is important not only to adults but to children as well. Therefore, any changes made to the system must take into consideration dependent children and their families. Policy makers must be careful not to cut the line that holds nearly one million children above the poverty threshold. In fact, they must consider how more children can be helped. A forthcoming report will examine whether and how some modest adjustments could further reduce poverty among families with children.

In the last few years since the solvency of Old Age, Survivors & Disability Insurance (OASDI) — more commonly known as Social Security — became a major topic of political debate, much of the discussion was narrowly focused on how to increase returns for retirees through a privatized system. Unfortunately, among other shortcomings, most of these privatization schemes were void of any real consideration of how those dependent upon disability and survivors benefits — primarily women, minorities and children — would be affected.

Recently, more attention has been given to the vital role Social Security plays in the lives of women and minorities, exposing what a detriment a privatized system would be to these groups. However until now, despite the fact that children represent significant portions of Social Security recipients in the African-American and Latino communities, analyses of how Social Security affects dependent children have been absent from the literature and much of the discussion. Based upon data from the March 1999 Current Population Survey, 26% of African-American Social Security recipients were children, 20% of Latino recipients were children, and 10% of white recipients were children. According to the U.S. Census Bureau, in 1998 36.7% of African-American children under 18 years of age, 34.7% of Latino children, and 15.1% of White children lived in homes where family income was below the poverty threshold index. Given the disproportionate levels of OASDI dependency and child poverty in minority communities, this report examines the impact of Social Security on child poverty among families in the lower 40% of the income distribution in 1998. While Social Security by no means eradicates poverty among extremely poor families with children, this report provides evidence that without Social Security benefits, not only would there be more children living in poverty but the depth of their poverty would be much greater.

In order to get a clear picture of how OASDI benefits affect poverty, families with children were divided into five groups (quintiles) based upon their annual family income. The first quintile represents the poorest 20% of families whose annual family income was between $0 and $21,188. The second quintile represents the next 20% of families with annual family income between $21,189 and $36,550. Families with negative income (denoting a loss) were excluded. Using this method of categorizing families by income, the first group would be considered low income families, and the second group lower middle income. Only the first two quintiles were used in this analysis because none of the families with income greater than $36,550 lived below the poverty threshold.

A two-step process was used to determine the effect of Social Security benefits on poverty rates among families with children. The first step involved calculating the share of families with children whose total annual income was below the poverty threshold index. This was labeled the actual poverty rate. Next, an adjusted poverty rate was estimated by calculating the share of families with children whose total annual income minus Social Security benefits was below the poverty threshold index. The percentage reduction in poverty due to Social Security benefits was calculated using the following formula:

Since distinctions were made on the basis of income, race and whether a family actually received OASDI, this report will be organized in a multi-layered format. First, poverty and the impact of Social Security will be examined separately for the two income groups. Second, within the two income groups the analysis will be divided by race between all families with children, and OASDI recipient families with children. Results for both the composite group of families as well as the subgroup of recipient families are included so that the effect of Social Security may be put in proper context. Not only are there measurable effects among those families who are dependent upon OASDI, but that effect is significant enough to effect overall national poverty rates as well. The accompanying tables will include results for families regardless of race, in addition to changes within racial groups. Finally, the report will conclude by addressing the major questions introduced in this study.

In 1998, 74% of Latino families with children who had incomes of $21,188 or less were in poverty, as were 69% of African-American families, and 60% of White families. Represented within these 6.1 million families were 14 million children under 18 years of age. On average, three out of four children whose family was in the lowest income group lived in poverty. For Latino children, the share was four out of five.

The average annual income for White families was greater than it was for both African-Americans and Latinos. On average, White families in this income group earned $11,792 per year while African-American families earned $11,008 and Latino families earned $11,445.

As for families receiving Social Security benefits, there were a greater percentage of White families with children receiving benefits of some type (8.4%), than there were among any other racial group. Latino families in this income group had the lowest share of Social Security recipients (6%).

The analysis of the overall effect of Social Security benefits on poverty rates for families with children in the first quintile shows that White families with children experienced the greatest reduction in poverty (5%) as a result of receiving Social Security benefits. African-American families had the second highest reduction (3%) and Latino families the lowest (2%). In other words, if these families had not received Social Security benefits, 63% of White families would be in poverty, as would 71% of African-American families and 75% of Latino families. Clearly, Social Security is an important source of income to these families.

These results logically follow from the factors observed above. White families had the lowest poverty rate due in part to their higher earnings. Their higher earnings in turn resulted in higher Social Security benefits, which were more effective in raising them above the poverty threshold. Similarly, as the group with the highest rates of poverty and lowest dollar amount of benefits, Social Security benefits were less effective in lifting Latino families out of poverty. These changes are presented in Table 2 below.

Next, we isolated only those families with children in the lowest income group who actually received Social Security benefits in 1998. Their actual poverty rates were slightly lower than the overall average and their average annual incomes were greater. For example, 59% of White families, 68% of African-American families, and 71% of Latino families with children who received OASDI in 1998 were in poverty. The average annual family incomes were $13,241 for White families, $13,117 for African-American families and $11,999 for Latino families. White families remained the highest income earners within this subgroup, but Latinos instead of African-Americans were the lowest earners. For all of these families, Social Security represented more than 50% of their annual income.

Looking specifically at those families with children in the first quintile that actually received benefits, we found that Social Security benefits had significant effects on poverty rates among all racial groups. Had these families not received their benefits, 37% more White families with children, 28% more African-American families with children and 22% more Latino families with children would have had annual incomes below the poverty threshold. This translates to 390,000 children who were rescued from poverty last year by virtue of the fact that their families received Social Security benefits. Those families who were moved out of poverty by Social Security tended to have higher annual incomes than those who remained in poverty, and their benefit levels were greater as well. These results are reported in Tables 3A & 3B.

Let’s now move the discussion to those families with annual income between $21,189 and $36,550. In 1998, 5% of Latino families with children, 3% of African-American families with children, and 0.5% of White families with children in this income group were in poverty. Represented within these nearly 130,000 families were almost 460,000 children under 18 years of age. On average, while only 3% of children whose family was in the second lowest income group lived in poverty, again Latino children experienced the highest incidence of poverty (7%).

The average annual income for White families in this group ($29,063) was still greater than that of African-Americans ($28,429) and Latinos ($28,594). African-American families with children remained the lowest earners in this group as well.

Unlike the first quintile group, the racial group with the largest share of Social Security recipients in the second quintile was African-Americans. Nearly 11% of African-American families with children received OASDI, as did 6% of White families and 5% of Latino families. Latinos remained the group with the highest poverty rate, as well as the least likely to receive benefits. Summary statistics are presented in Table 4.

In the analysis of the overall effect of Social Security benefits on poverty rates for families with children in the second quintile, we found again that White families with children experienced the greatest reduction in poverty (83%) as a result of receiving Social Security benefits. African-American families had the second highest reduction (60%) and Latino families the lowest (14%). In other words, had no families received Social Security benefits, 3% of White families would be in poverty, as would 7% of African-American families and 6% of Latino families. Compared to the actual rates presented in Table 4, these adjusted rates (excluding Social Security) are clearly as much as two to six times higher than the actual rates. Though the poverty rates for this group (actual and adjusted) are more modest than those for the poorest 20% of families, we found that Social Security was more effective in lifting families in this group out of poverty. This is likely explained by the fact that families in this group are closer to the poverty threshold. These changes are presented in Table 5.

We repeated the process of isolating only those families with children who actually received Social Security benefits in 1998 for the second income group. The actual poverty rates for second quintile White and Latino OASDI families with children were only slightly higher than their overall averages. However, for second quintile African-American OASDI families the actual poverty rate was almost ten percentage points higher than their overall average. This implies that the poorest African-American families with children in the second quintile were those who received Social Security. Because the average annual family income for African-American OASDI families was $27,245 — over $1,100 less per year than the overall African-American average — we discover that this is indeed the case. The corresponding average annual family incomes for second quintile White and Latino OASDI families were $28,656 and $29,311, respectively. For all of these families, Social Security represented over 30% of their annual income.

Looking specifically at those families with children in the second quintile that received benefits, we found that Social Security benefits had significant effects on poverty rates among all racial groups. Had these families not received their benefits, 98% more White families with children, 76% more African-American families with children and 71% more Latino families with children would have had annual incomes below the poverty threshold. This translates to an additional 570,000 children who were rescued from poverty last year by virtue of the fact that their families received Social Security benefits. For all racial groups except African-Americans, those families who were moved out of poverty by Social Security tended to have lower annual incomes than those who remained in poverty. All had higher benefit levels than those who remained in poverty. These results are reported in Tables 6A & 6B.

While the majority of families with children do not receive Social Security, for many of those who do, the benefits are significant enough to prevent the family from slipping into poverty. The CPS data did not permit us to differentiate between types of benefits (i.e. retirement, disability, or survivors insurance). However, data from the Social Security Administration’s Annual Statistical Supplement, 1999 to the Social Security Bulletin confirms that the majority of children under 18 years of age are receiving either disability or survivors’ benefits. These benefits have the greatest impact on families who are closer to the poverty threshold. This group consists mainly of those on the higher end of the lowest income group, and the lower end of the second lowest income group; the majority of whom are White families. While we find the greatest degree of dependency among White families with children in the first quintile, African-Americans have the highest concentration of recipients among second quintile families with children.

Despite the fact that nearly one million children were lifted out of poverty by Social Security, there remained still millions more who were not. However, in some cases where Social Security did not keep a family out of poverty, it was instrumental in keeping large numbers of people out of "extreme poverty." For our purposes, "extreme poverty" is defined as having an income of less than half the appropriate poverty threshold index. For example, Figure A below depicts the overall effect of Social Security benefits on extreme poverty among families with children.

While these differences are relatively meager (2 to 3 percentage points), as illustrated in Figure B, the differences among OASDI recipient families are more striking.

The subgroup of OASDI recipients experienced reductions in extreme poverty ranging from 74% among Latino families to 80% among White and African-American families. Therefore, Social Security was not only successful at moving families on the margin completely out of poverty, but it also moved a number of families out of extreme poverty (i.e. above half the poverty threshold).

As discussions about how to strengthen Social Security continue, it would be wise to broaden the scope beyond retirees. Social Security is more than a retirement program; it’s a family insurance program. As this report has demonstrated Social Security is important not only to adults but to children as well. Therefore, any changes made to the system must take into consideration dependent children and their families. Policy makers must be careful not to cut the line that holds nearly one million children above the poverty threshold. In fact, they must consider how more children can be helped. A forthcoming report will examine whether and how some modest adjustments could further reduce poverty among families with children.