oversight

Social Security Reform: Implications for the Financial Well-Being of Women

Published by the Government Accountability Office on 1997-04-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                           United States General Accounting Office

GAO                        Testimony
                           Before the Subcommittee on Social Security, Committee
                           on Ways and Means, House of Representatives




For Release on Delivery
Expected at 10:00 a.m.
Thursday, April 10, 1997
                           SOCIAL SECURITY
                           REFORM

                           Implications for the
                           Financial Well-Being of
                           Women
                           Statement of Jane L. Ross, Director
                           Income Security Issues
                           Health, Education, and Human Services Division




GAO/T-HEHS-97-112
Social Security Reform: Implications for the
Financial Well-Being of Women

               Mr. Chairman and Members of the Subcommittee:

               I am pleased to be here to discuss the impacts of proposals to finance and
               restructure the Social Security system, specifically the impacts on the
               financial well-being of women. As you know, the Social Security trust
               funds are predicted to pay out more in annual benefits than they collect in
               taxes beginning in 2012 and are expected to be depleted by 2029. Recently,
               the Social Security Advisory Council offered three alternative reform
               proposals to address this long-term financing problem. Each of the
               alternative proposals also affects the financial well-being of beneficiaries,
               especially women. One reason to be especially concerned about the
               financial well-being of women is that elderly unmarried women are much
               more likely to be living below the poverty line. For example, 22 percent of
               unmarried elderly women have income below the poverty threshold,
               compared with 15 percent of unmarried elderly men and only 5 percent of
               elderly married couples.

               Today, I would like to discuss how and why the benefits for women differ
               from those for men under the current Social Security system and how
               each of the three reform proposals of the Social Security Advisory Council
               might particularly affect women. The information I am providing today is
               based on previous GAO work and contains preliminary findings from a
               report being prepared at the request of the Ranking Minority Member of
               the Subcommittee.1

               In summary, our work shows that, although the provisions of the Social
               Security Act do not differentiate between men and women, women tend to
               receive lower benefits than men. This is due primarily to differences in
               lifetime earnings because women tend to have lower wages and fewer
               years in the workforce. Women’s experience under pension plans differs
               from men’s not only because of earnings differences but also because of
               differences in investment behavior and longevity. Moreover, public and
               private pension plans do not offer the same social insurance protections
               that Social Security does.

               Furthermore, some of the provisions of the Social Security Advisory
               Council’s three proposals may exacerbate the differences in men and
               women’s benefits. For example, proposals that call for individual
               retirement accounts will pay benefits that are affected by investment

               1
                Pension Plans: Survivor Benefit Coverage for Wives Increased After 1984 Pension Law
               (GAO/HRD-92-49, Feb. 28, 1992); Social Security: Issues Involving Benefit Equity for Working Women
               (GAO/HEHS-96-55, Apr. 10, 1996); and 401(k) Pension Plans: Many Take Advantage of Opportunity to
               Ensure Adequate Retirement Income (GAO/HEHS-96-176, Aug. 2, 1996).



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                            behavior and longevity. Expected changes in women’s labor force
                            participation rates and increasing earnings will reduce but probably not
                            eliminate these differences.


                            Over their lifetimes, men and women differ in many ways that have
Demographic                 consequences for how much they will receive from Social Security and
Characteristics and         pensions. Women make up about 60 percent of the elderly population and
Labor Market                less than half of the Social Security beneficiaries who are receiving retired
                            worker benefits, but they account for 99 percent of those beneficiaries
Attachment Affect           who receive spouse or survivor benefits. A little less than half of working
Retirement Income           women between the ages of 18 and 64 are covered by a pension plan, while
                            slightly over half of working men are covered. The differences between
for Men and Women           men and women in pension coverage are magnified for those workers
Differently                 nearing retirement age—over 70 percent of men are covered compared
                            with about 60 percent of women.


Labor Force Participation   Labor force participation rates differ for men and women, with men being
and Earnings Differ for     more likely, at any point in time, to be employed or actively seeking
Men and Women               employment than women.2 The gap in labor force participation rates,
                            however, has been narrowing over time as more women enter the labor
                            force, and the Bureau of Labor Statistics predicts it will narrow further. In
                            1948, for example, women’s labor force participation rate was about a
                            third of that for men, but by 1996, it was almost four-fifths of that for men.
                            The labor force participation rate for the cohort of women currently
                            nearing retirement age (55 to 64 years of age) was 41 percent in 1967 when
                            they were 25 to 34 years of age. The labor force participation rate for
                            women who are 25 to 34 years of age today is 75 percent—an increase of
                            over 30 percentage points.

                            Earnings histories also affect retirement income, and women continue to
                            earn lower wages than men. Some of this difference is due to differences
                            in the number of hours worked, since women are more likely to work
                            part-time and part-time workers earn lower wages. However, median
                            earnings of women working year-round and full-time are still only about
                            70 percent of men’s.3



                            2
                            The labor force participation rate is the proportion of the population under consideration who are
                            working or actively seeking employment.
                            3
                             Even after accounting for differences in education, work effort, age, and other characteristics that
                            affect wages, women earn wages that are about 15 to 20 percent lower than men’s wages, on average.



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                           Financial Well-Being of Women




                           The lower labor force participation of women leads to fewer years with
                           covered earnings4 on which Social Security benefits are based.5 In 1993,
                           the median number of years with covered earnings for men reaching 62
                           was 36 but was only 25 for women. Almost 60 percent of men had 35 years
                           with covered earnings, compared with less than 20 percent of women.
                           Lower annual earnings and fewer years with covered earnings lead to
                           women’s receiving lower monthly retired worker benefits from Social
                           Security, since many years with low or zero earnings are used in the
                           calculation of Social Security benefits. On average, the retired worker
                           benefits received by women are about 75 percent of those received by
                           men. In many cases, a woman’s retired worker benefits are lower than the
                           benefits she is eligible to receive as the spouse or survivor of a retired
                           worker.6


Life Expectancies Differ   Women tend to live longer than men and thus may spend many of their
for Men and Women          later retirement years alone. A woman who is 65 years old can expect to
                           live an additional 19 years (to 84 years of age), and a man of 65 can expect
                           to live an additional 15 years (to 80 years of age). By 2070, the Social
                           Security Administration projects that a 65-year-old woman will be able to
                           expect to live another 22 years, and a 65-year-old-man, another 18 years.
                           Additionally, husbands tend to be older than their wives and so are likely
                           to die sooner. Differences in longevity do not currently affect the receipt
                           of monthly Social Security benefits but can affect income from pensions if
                           annuities are purchased individually.


Women Invest More          Many pension plans give participants responsibility for managing the
Conservatively Than Men    investment of their pension assets, and differences in how men and
                           women invest can lead to differences in pension benefits they receive.
                           When making financial decisions, women tend to be more risk averse than
                           men. One consequence of this is that women tend to invest more of their
                           pension funds in safer but lower yielding assets, such as government
                           bonds. The results of a recent study7 of the federal Thrift Savings Plan
                           indicate that men are much more likely to invest in the stock fund than are

                           4
                            Years of covered earnings are the years in which the individual received earnings on which Social
                           Security taxes were paid.
                           5
                            Social Security benefits are based on the 35 years of highest covered earnings.
                           6
                            GAO/HEHS-96-55, Apr. 10, 1996.
                           7
                            Richard P. Hinz, David D. McCarthy, and John A. Turner, “Are Women Conservative Investors?
                           Gender Differences in Participant Directed Pension Investments,” in Positioning Pensions for the Year
                           2000, Olivia Mitchell, ed. (Philadelphia: University of Pennsylvania Press, 1996).



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                       women. The authors estimated that, after 35 years of participation in the
                       plan at historical yields and identical contributions, the difference in
                       investment behavior between men and women can lead to men having a
                       pension portfolio that is 16 percent larger.


                       Social Security provisions and pension plan provisions differ in several
Pension Plan           ways (see app. I for a summary). Under Social Security, the basic benefit a
Provisions Offer       worker receives who retires at the normal retirement age (NRA)8 is based
Different Benefits     on the 35 years with the highest covered earnings.9 The formula is
                       progressive in that it guarantees that higher-income workers receive
From Social Security   higher benefits, while the benefits of lower-income workers are a higher
                       percentage of their preretirement earnings. The benefit is guaranteed for
                       the life of the retired worker and increases annually with the cost of living.

                       Private pensions are different. They can be classified into two basic types:
                       defined benefit and defined contribution plans. Pension benefits in defined
                       benefit plans are generally based on a formula that includes years with the
                       firm, age at retirement, and salary averaged over some number of years.10
                       Employers offering defined contribution plans generally promise to make
                       guaranteed periodic contributions to workers’ accounts, but the amount of
                       retirement benefits is not specified. The benefits from defined contribution
                       plans depend on the contributions plus investment returns or losses.
                       Today, defined contribution plans are the most prevalent type of pension
                       plan, and 401(k) plans are one of the fastest growing defined contribution
                       plan types.11 Typically, at retirement, workers receive a joint and survivor
                       annuity that provides pension benefits to the surviving spouse after the
                       worker’s death, unless both the worker and spouse elect, in writing, not to
                       take the joint and survivor annuity. In this instance, the retiring worker


                       8
                        Currently, the normal retirement age is 65 years. It is set to gradually increase to 67 for those born in
                       1960 or after. The early retirement age (the earliest age at which a worker qualifies for Social Security
                       retirement benefits) will remain at 62.
                       9
                        The calculation of a worker’s basic benefit amount first involves calculating average indexed monthly
                       earnings (AIME) on the basis of the 35 years of highest earnings. For workers becoming eligible for
                       Social Security benefits in 1997, benefits are equal to 90 percent of the first $455 of AIME, plus
                       32 percent of the AIME from $455 to $2,741, plus 15 percent of the AIME in excess of $2,741. The dollar
                       amounts in the formula are called the bend points, and the percentages are called the conversion
                       factors.
                       10
                         In defined benefit plans that are integrated with Social Security, pension benefits also depend on the
                       size of an individual’s Social Security benefit.
                       11
                        401(k) pension plans are salary reduction plans that allow participants to contribute, before taxes, a
                       portion of their salary to a retirement account. Many employers match workers’ contributions to these
                       accounts. Also, many employers allow participants to direct the investment of their account balances.



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                          may elect, along with the spouse, to take a single life annuity or a
                          lump-sum distribution if allowed under the plan.

                          When workers retire, they are uncertain how long they will live and how
                          quickly the purchasing power of a fixed payment will deteriorate. They run
                          the risk of outliving their assets. Annuities provide insurance against
                          outliving assets. Some annuities provide, though at a higher cost or
                          reduced initial benefit, insurance against inflation risk, although annuity
                          benefits often do not keep pace with inflation. Many pension plans are
                          managed under a group annuity contract with an insurance company that
                          can provide lifetime benefits. Individual annuities, however, tend to be
                          costly.


Benefits for Dependents   Under Social Security, the dependents of a retired worker may be eligible
Differ Under Social       to receive benefits. For example, the spouse of a retired worker is eligible
Security and Pensions     to receive up to 50 percent of the worker’s basic benefit amount, while a
                          dependent surviving spouse is eligible to receive up to 100 percent of the
                          deceased worker’s basic benefit. Furthermore, divorced spouses and
                          survivors are eligible to receive benefits under a retired worker’s Social
                          Security record provided they were married for at least 10 years. If the
                          retired worker has a child under 18 years old, the child is eligible for Social
                          Security benefits, as is the dependent nonelderly parent of the child. The
                          retired worker’s Social Security benefit is not reduced to provide benefits
                          to dependents and former spouses.

                          Pensions, both public and private, generally do not offer the same
                          protections to dependents as Social Security. Private and public pension
                          benefits are based on a worker’s employment experience and not the size
                          of the worker’s family. At retirement, a worker and spouse normally
                          receive a joint and survivor annuity so that the surviving spouse will
                          continue to receive a pension benefit after the retired worker’s death. A
                          worker, with the written consent of the spouse, can elect to take
                          retirement benefits in the form of a single life annuity so that benefits are
                          guaranteed only for the lifetime of the retired worker.

                          This wasn’t always the case. Under the Employee Retirement Income
                          Security Act of 1974, a married worker had the option to choose an
                          annuity that provided benefits only as long as the retiree lived.
                          Recognizing marriage as an economic partnership, the Congress sought
                          through the Retirement Equity Act of 1984 to bring the retiring worker’s
                          spouse directly into the decision-making process concerning benefit



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                             payment options. Under this act, a joint and survivor annuity became the
                             normal payout option and written spousal consent is required to choose
                             another option. This requirement was prompted partly by testimony
                             before the Congress by widows who stated that they were financially
                             unprepared at their husbands’ death because they were unaware of their
                             husbands’ choice to not take a joint and survivor annuity. Through the
                             spousal consent requirement, the Congress envisioned that, among other
                             things, a greater percentage of married men would retain the joint and
                             survivor annuity and give their spouses the opportunity to receive survivor
                             benefits.

                             The monthly benefits under a joint and survivor annuity, however, are
                             lower than under a single life annuity. Moreover, pension plans do not
                             generally contain provisions to increase benefits to the retired worker for
                             a dependent spouse or for children. As under Social Security, divorced
                             spouses can also receive part of the retired worker’s pension benefit if a
                             qualified domestic relations order is in place. However, the retired
                             worker’s pension benefit is reduced in order to pay the former spouse.


                             The three alternative proposals of the Social Security Advisory Council
Some Reform                  would make changes of varying degrees to the structure of Social Security.
Proposals Would              The key features of the proposals are summarized in appendix II.
Make Social Security
More Like Pension
Plans
The Maintain Benefits Plan   The Maintain Benefits (MB) plan would make only minor changes to the
Would Make Fewest            structure of current Social Security benefits. The major change that would
Changes to Social Security   affect women’s benefits is the extension of the computation period for
                             benefits from 35 years to 38 years of covered earnings.12 Currently,
                             earnings are averaged over the 35 years with the highest earnings to
                             compute a worker’s Social Security benefits. If the worker has worked less
                             than 35 years, then some of the years of earnings used in the calculation
                             are equal to zero. Extending the computation period for the lifetime
                             average earnings to 38 years would have a greater impact on women than
                             on men. Although women’s labor force participation is increasing, the
                             Social Security Administration forecasts that fewer than 30 percent of the
                             women retiring in 2020 will have 38 years of covered earnings, compared
                             with almost 60 percent of men.

                             12
                               One supporter of the MB plan does not support this provision.



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The Individual Accounts     The Individual Accounts (IA) plan would keep many features of the current
Plan Would Add a Defined    Social Security system but add an individual account modeled after the
Contribution Component      401(k) pension plan. Workers would be required to contribute an
                            additional 1.6 percent of taxable earnings to their individual account,
                            which would be held by the government. Workers would direct the
                            investment of their account balances among a limited number of
                            investment options. At retirement, the distribution from this individual
                            account would be converted by the government into an indexed annuity.

                            The IA plan, like the MB plan, would extend the computation period to 38
                            years; it would also change the basic benefit formula by lowering the
                            conversion factors at the higher earnings level. This plan would also
                            accelerate the legislated increase in the normal retirement age and then
                            index it to future increases in longevity. As a consequence of these
                            changes, basic Social Security benefits would be lower for all workers, but
                            workers would also receive a monthly payment from the annuitized
                            distribution from their individual account, which proponents claim would
                            offset the reduction in the basic benefit.

                            In addition to extending the computation period, elements of the IA plan
                            that would disproportionately affect women are the changes in benefits
                            received by spouses and survivors, since women are much more likely to
                            receive spouse and survivor benefits. The spouse benefit would be
                            reduced from 50 percent of the retired worker’s basic benefit amount to
                            33 percent. The survivor benefit would increase from 100 percent of the
                            deceased worker’s basic benefit to 75 percent of the couple’s combined
                            benefit if the latter was higher. These changes would probably result in
                            increased lifetime benefits for many women. Additionally, at retirement a
                            worker and spouse would receive a joint and survivor annuity for the
                            distribution of their individual account unless the couple decided on a
                            single life annuity.


The Personal Security       The Personal Security Accounts (PSA) plan would make the most dramatic
Accounts Plan Would         changes to the structure of Social Security. This plan would replace the
Replace Social Security     current system with a two-tier system. The tier I benefit would be a flat
                            benefit based on years of covered earnings. The full tier I benefit, which
With a Flat Benefit and a   would be equivalent to 65 percent of the poverty threshold, would be
Defined Contribution        received after 35 years of covered earnings. The tier II benefit would be
Component                   the distribution from the retired worker’s personal security account. The
                            personal security account is modeled after the 401(k) pension plan and
                            would be funded by diverting 5 percentage points of the worker’s Social



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                           Security payroll tax into the account,13 which would not be held by the
                           government. Proponents of the PSA plan claim that over a worker’s lifetime
                           the tier I benefits plus the tier II distribution would be larger than the
                           lifetime Social Security benefits currently received by retired workers. The
                           worker would direct the investment of his or her account assets. At
                           retirement, workers would not be required to annuitize the distribution
                           from their personal security account but could elect to receive a lump-sum
                           payment. This could potentially affect women disproportionately, since
                           the worker is not required to consult with his or her spouse regarding the
                           disposition of the personal account distribution.

                           Under the PSA plan, the tier I benefit for spouses would be equal to the
                           higher of their own tier I benefit or 50 percent of the full tier I benefit.
                           Furthermore, spouses would receive their own tier II accumulations, if
                           any. The tier I benefit for a survivor would be 75 percent of the benefit
                           payable to the couple; in addition, the survivor could inherit the balance of
                           the deceased spouse’s personal security account assets.


                           Many of the proposed changes to Social Security would affect the benefits
Effects on Women’s         received by men and by women differently.14 The current Social Security
Benefits of Changing       system is comparable to a defined benefit plan’s paying a guaranteed
Basic Social Security      lifetime benefit that is increased with the cost of living. Each of the
                           Advisory Council proposals would potentially change the level of that
Law                        benefit, and two of the proposals would create an additional defined
                           contribution component. Not only would retired worker benefits be
                           changed by these proposals, but the level of benefits for spouses and
                           survivors would be affected.


Conservative Investment    Two Advisory Councils plans—the IA and PSA plans—would create defined
Behavior May Have          contribution accounts for workers. Both plans would also lower basic
Adverse Consequences for   Social Security benefits. On the basis of calculations by the National
                           Academy of Social Insurance, the IA plan would lower basic benefits by
Retirement Income          17 percent for the average earner, while the PSA plan would lower the basic
                           or tier I benefit to about 47 percent of the benefit paid to today’s average
                           earner. The rest of a retired worker’s Social Security benefit would come
                           from the distribution from his or her private account. Under both plans,

                           13
                             The payroll tax for Social Security is 12.4 percent of taxable earnings. The tax is split evenly between
                           the employee and employer.
                           14
                            The proposed changes could also affect benefits received from pension plans that are integrated with
                           Social Security. How the changes in these benefits would affect men and women is beyond the scope
                           of our testimony.



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                            the account balances at retirement would depend on the contributions
                            made to the worker’s account and investment returns or losses on the
                            account assets. Since women tend to earn lower wages, they would be
                            contributing less, on average, than men to their accounts. Furthermore,
                            even if contributions were equal, women tend to be more conservative
                            investors than men, which could lead to lower investment returns.
                            Consequently, women would typically have smaller account balances at
                            retirement and would receive lower benefits than men. The difference in
                            investment strategy could lead to a situation in which men and women
                            with exactly the same labor market experiences receive substantially
                            different Social Security benefits. The extent to which investor education
                            can close the gap in investment behavior between men and women is
                            unknown.


How Account Distributions   The two Advisory Council proposals with individual or personal accounts
Are Handled Affects         differ in the handling of the distribution of the account balances at
Benefit Levels              retirement. The IA plan would require annuitization of the distribution at
                            retirement, and choosing a single life annuity or a joint and survivor
                            annuity would be left to the worker and spouse. If the single life annuity
                            option for individual account balances was chosen, then the spouse would
                            receive the survivor’s basic benefit after the death of the retired worker
                            plus the annuitized benefit based on the work records of both individuals.

                            The PSA plan would not require that the private account distribution be
                            annuitized at retirement. A worker and spouse could take the distribution
                            as a lump sum and attempt to manage their funds so that they did not
                            outlive their assets. If the assets were exhausted, the couple would have
                            only their basic tier I benefits, plus any other savings and pension benefits.
                            Furthermore, even if personal account tier II assets were left after the
                            death of the retired worker, the balance of the PSA account would not
                            necessarily have to be left to the survivor. If a worker and spouse chose to
                            purchase an annuity at retirement, then the couple would receive a lower
                            monthly benefit than would be available from a group annuity.

                            Both the IA and the PSA plans could lead to situations where men and
                            women in identical circumstances received different Social Security
                            benefits. Suppose a man and woman had the same labor market
                            experiences and the same amount in their private accounts and then
                            annuitized their distributions. The monthly annuity payments would
                            reflect the differences in expected longevity (separate life tables could be
                            used for men and women in the calculation of annuitized benefits) and,



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              although the expected lifetime payments would be the same, the monthly
              payments to the woman would be lower, since women have longer life
              expectancies.


              Even though the current provisions of Social Security are gender neutral,
Conclusions   differences during the working and retirement years may lead to different
              benefits for men and women. For example, differences in labor force
              attachment, earnings, and longevity lead to women’s being more likely
              than men to receive spouse or survivor benefits. Women who do receive
              retired worker benefits typically receive lower benefits than men. As a
              result of lower Social Security benefits and the lower likelihood of
              receiving pension benefits, among other causes, elderly single women
              experience much higher poverty rates than elderly married couples and
              elderly single men.

              Social Security is a large and complex program that protects most workers
              and their families from income loss because of a worker’s retirement.
              Public and private pension plans do not offer the social insurance
              protections that Social Security does. Pension benefits are neither
              increased for dependents nor generally indexed to the cost of living as are
              Social Security benefits. Typically, at retirement a couple will receive a
              joint and survivor annuity that initially pays monthly benefits that are 15 to
              20 percent lower than if they had chosen to forgo the survivor benefits
              with a single life annuity. Furthermore, under a qualified domestic
              relations order, a divorced retired worker’s pension benefits may be
              reduced to pay benefits to a former spouse.

              While the three alternative proposals of the Social Security Advisory
              Council are intended to address the long-term financing problem, they
              would make changes that could affect the relative level of benefits
              received by men and women. Each of the proposals has the potential to
              exacerbate the current differences in benefits between men and women.
              Narrowing the gap in labor force attachment, earnings, and investment
              behavior may reduce the differences in benefits. But as long as these
              differences remain, men and women will continue to experience different
              outcomes with regard to Social Security benefits.

              This concludes my prepared statement. I would be happy to answer any
              questions you or other Members of the Subcommittee may have.




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               For more information on this testimony, please call Jane Ross on
Contributors   (202) 512-7230; Frank Mulvey, Assistant Director, on (202) 512-3592; or
               Thomas Hungerford, Senior Economist, on (202) 512-7028.




               Page 11                                                   GAO/T-HEHS-97-112
Appendix I

Features of Social Security Under Current
Law and Those of Pensions


                                                                                  Current pension plan provisions
                                                            Federal Employees’
                               Provisions under             Retirement
                               current Social Security      System/Thrift Savings                                   Defined contribution
Type of beneficiarya           law                          Plan                        Defined benefit plans       plans
Retired worker                 — Benefit computation is     — FERS benefit is based Benefit is based on             Benefit is based on
                               based on 35 years of         on statutory formula    formula under plan              contributions of
                               highest covered earnings     — TSP benefit is based documents                        employee, employer, or
                               — Progressive formula        on employee and                                         both plus investment
                               leads to redistribution      government                                              returns of individual
                               — Benefits reduced           contributions plus                                      account balances
                               actuarially if taken         investment returns of
                               between 62 and normal        individual account
                               retirement age (NRA);        balances
                               increased if taken after
                               NRA
                               — NRA to increase to 67
                               years for those born after
                               1959
                                                            b                           b                           b
Spouse                         — Benefit is 50% of the
                               retired worker’s benefit
                               — Benefit is actuarially
                               reduced if taken
                               between 62 and NRA
Survivor                       — Benefit is equal to        Joint and survivor          Joint and survivor          Joint and survivor
                               amount deceased              annuity is normal form of   annuity is normal form of   annuity is normal form of
                               spouse would be              annuity, and survivor       annuity                     annuity
                               receiving but not less       receives 50% of basic
                               than 82-1/2% of              annuity
                               deceased spouse’s
                               benefit
                               — Benefit is actuarially
                               reduced if taken
                               between 62 and NRA
Dually entitled beneficiaryc   Receives own retired         b                           b                           b

                               worker benefit plus
                               difference (if positive)
                               between spouse or
                               survivor benefit and
                               his/her retired worker
                               benefit
                                                                                                                                  (continued)




                                                 Page 12                                                                 GAO/T-HEHS-97-112
                                           Appendix I
                                           Features of Social Security Under Current
                                           Law and Those of Pensions




                                                                                    Current pension plan provisions
                                                          Federal Employees’
                           Provisions under               Retirement
                           current Social Security        System/Thrift Savings                                         Defined contribution
Type of beneficiarya       law                            Plan                           Defined benefit plans          plans
Divorced and surviving     — Must have been            Qualifying court order            Qualified domestic             Qualified domestic
divorced spouse            married for at least 10                                       relations order                relations order
                           years and currently be
                           unmarried
                           — Must be at least 62
                           years old for divorced
                           spouse, 60 years old for
                           divorced survivor
                           — Benefit actuarially
                           reduced if younger than
                           NRA
                           — Divorced spouse
                           benefit is 50% of retired
                           worker’s benefit
                           — Surviving divorced
                           spouse benefit is 100%
                           of retired worker’s benefit
                                                          b                              b                              b
Mother or father and       — Have eligible child in
widowed mother or father   care
plus child                 — Under 65 years old
                           — 50% of retired
                           worker’s benefit plus
                           50% of child’s benefit
                           — 75% of deceased
                           worker’s benefit plus
                           75% of child’s benefit

                                           a
                                               Beneficiary categories are based on Social Security definitions.
                                           b
                                               Not applicable.
                                           c
                                               Entitled to benefit both as retired worker and as spouse or survivor of retired worker.




                                           Page 13                                                                             GAO/T-HEHS-97-112
Appendix II

Features of Social Security Under Current
Law and Those of Three Reform Proposals


                               Provisions under                   Reform proposals of 1994-96 Social Security Advisory Council
                               current Social Security                                                           Personal security
Type of beneficiarya           law                          Maintain benefits         Individual accounts        accounts
Retired worker                 — Benefit computation is     Extends computation       — Extends computation      — Creates two-tier
                               based on 35 years of         period from 35 years to   period from 35 years to    system with tier I a flat
                               highest covered earnings     38 years of covered       38 years of covered        benefit based on years
                               — Progressive formula        earnings                  earnings                   of covered earnings and
                               leads to redistribution                                — Changes benefit          tier II a personal security
                               — Benefits reduced                                     formula by lowering        account (PSA) based on
                               actuarially if taken                                   conversion factors         defined contribution
                               between 62 and normal                                  — Accelerates increase     pension
                               retirement age (NRA);                                  of NRA and indexes to      — Accelerates increase
                               increased if taken after                               longevity                  of NRA and indexes to
                               NRA                                                    — Creates individual       longevity
                               — NRA to increase to 67                                account (IA) based on      — Increases early
                               years for those born after                             defined contribution       retirement age to 65
                               1959                                                   pension                    years
Spouse                         — Benefit is 50% of the      Same as current law       — Benefits are lowered     Benefits are tier II
                               retired worker’s benefit                               from 50% to 33% of         accumulations plus 50%
                               — Benefit is actuarially                               retired worker’s benefit   of full tier I benefit
                               reduced if taken                                       — Joint and survivor
                               between 62 and NRA                                     annuity with IA balance
Survivor                       — Benefit is equal to        Same as current law       — 75% of couple’s          75% of benefit payable
                               amount deceased                                        combined benefit           to couple plus eligible to
                               spouse would be                                        — Joint and survivor       inherit balance of
                               receiving but not less                                 annuity with IA balance    deceased spouse’s PSA
                               than 82 1/2% of
                               deceased spouse’s
                               benefit
                               — Benefit is actuarially
                               reduced if taken
                               between 62 and NRA
Dually entitled beneficiaryb   Receives own retired         Same as current law       Higher of own basic        Tier II accumulations
                               worker benefit plus                                    benefit or 33% of          plus higher of own tier I
                               difference (if positive)                               spouse’s benefit           benefit or 50% of full tier
                               between spouse or                                                                 I benefit
                               survivor benefit and
                               his/her retired worker
                               benefit
                                                                                                                                (continued)




                                                 Page 14                                                               GAO/T-HEHS-97-112
                                           Appendix II
                                           Features of Social Security Under Current
                                           Law and Those of Three Reform Proposals




                           Provisions under                      Reform proposals of 1994-96 Social Security Advisory Council
                           current Social Security                                                                      Personal security
Type of beneficiarya       law                            Maintain benefits              Individual accounts            accounts
Divorced and surviving     — Must have been            Same as current law               No mention                     No mention
divorced spouse            married for at least 10
                           years and currently be
                           unmarried
                           — Must be at least 62
                           years old for divorced
                           spouse, 60 years old for
                           divorced survivor
                           — Benefit actuarially
                           reduced if younger than
                           NRA
                           — Divorced spouse
                           benefit is 50% of retired
                           worker’s benefit
                           — Surviving divorced
                           spouse benefit is 100%
                           of retired worker’s benefit
Mother or father and       — Have eligible child in       Same as current law            Same as for spouse or          Same as for spouse or
widowed mother or father   care                                                          survivor plus child’s          survivor plus child’s
plus child                 — Under 65 years old                                          benefit, which is same as      benefit, which is same as
                           — 50% of retired                                              current law                    current law
                           worker’s benefit plus
                           50% of child’s benefit
                           — 75% of deceased
                           worker’s benefit plus
                           75% of child’s benefit

                                           a
                                               Beneficiary categories are based on Social Security definitions.
                                           b
                                               Entitled to benefits both as retired worker and as spouse or survivor of retired worker.




(207004)                                   Page 15                                                                             GAO/T-HEHS-97-112
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