Social Security Reform: Implications for Women

Published by the Government Accountability Office on 1999-02-03.

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 2:30 p.m.
Wednesday, February 3, 1999
                              SOCIAL SECURITY

                              Implications for Women
                              Statement of Barbara D. Bovbjerg, Associate Director
                              Income Security Issues
                              Health, Education, and Human Services Division

Social Security Reform: Implications for

               Mr. Chairman and Members of the Subcommittee:

               Thank you for inviting me here today to speak about women and Social
               Security. Social Security has had a significant positive impact on the
               nation’s elderly. Since 1959, poverty rates for the elderly have fallen from
               35 percent to 10.5 percent, thanks largely to this insurance program.
               Nevertheless, some elderly women are at greater risk of living in poverty.
               In 1996, 55 percent of older women would have had incomes below the
               poverty line without Social Security.

               My remarks today focus on (1) how women currently fare under Social
               Security, (2) how they might be affected by some of the proposed changes
               in benefits to restore solvency, and (3) how women might fare under a
               system restructured to include individual accounts. My testimony is based
               primarily upon a report already issued to the Subcommittee.1

               In summary, women have benefited significantly from the Social Security
               program. Many women who work are advantaged by the progressive
               benefit formula that provides larger relative benefits to those with lower
               lifetime earnings. Women who did not work or had low lifetime earnings
               and who were married benefit from the program’s spousal and survivor
               benefit provisions. However, women typically receive lower monthly
               benefits than men because benefits are based on earnings and the number
               of years worked. Any across-the-board benefit cuts to restore solvency
               might fall disproportionately on women as a group because they rely more
               heavily on Social Security income than men do. Other types of reform
               approaches can have positive or negative effects on women depending on
               how the reforms are designed.

               Restructuring Social Security to include individual accounts also will likely
               have different effects on men and women. Because women earn less than
               men, contributions of a fixed percentage of earnings would put less into
               women’s individual retirement accounts. Available evidence indicates that
               women also tend to invest more conservatively than men and thus would
               likely earn smaller returns on their accounts, although they would bear
               less risk. In addition, how such accounts are structured will be extremely
               important to women. For example, whether individuals will be required to
               purchase annuities with the proceeds of their accounts at retirement and
               how the annuities are priced could affect women quite differently from
               men. How benefits might be distributed to divorcees and how accounts

                Social Security Reform: Implications for Women’s Retirement Income (GAO/HEHS-98-42, Dec. 31,

               Page 1                                                                      GAO/T-HEHS-99-52
                       Social Security Reform: Implications for

                       are transferred to survivors could critically affect the retirement income of
                       some elderly women. Understanding the potential consequences of the
                       various reform proposals can help ensure that Social Security continues to
                       protect vulnerable populations, such as elderly unmarried women.

                       Social Security has provided significant income protection for the nation’s
How Women              women. While women, on average, have lower earnings than men, the
Currently Fare Under   program has several features that are advantageous to women. First,
Social Security        unlike lifetime annuities purchased from private insurance companies,
                       Social Security does not reduce women’s benefits to account for the fact
                       that, as a group, they live longer than men. Second, Social Security uses a
                       progressive formula to calculate individual benefits, which replaces a
                       relatively larger proportion of lifetime earnings for people with low
                       earnings than for people with high earnings. Because women typically
                       earn less than men, women’s monthly benefits replace a larger proportion
                       of their earnings. The program also provides benefits to retirees’
                       dependents—such as spouses, ex-spouses, and survivors—and roughly
                       99 percent of these benefits go to women.2

                       Nevertheless, women receive lower Social Security benefits than men. In
                       December 1997, the average monthly retired worker benefit for women
                       was $662.40 compared to $860.50 for men. This is because Social Security
                       benefits are based primarily on a worker’s lifetime covered earnings,
                       which on average are much lower for women.3 Although labor market
                       differences between men and women have narrowed over time, the
                       Bureau of Labor Statistics does not project that they will disappear
                       entirely, even in the long term. Thus, women can expect to continue to
                       receive lower average monthly benefits than men, although these
                       differences are partially offset by the presence of spousal benefits.

                       Lower lifetime earnings can be traced to two principal causes. First,
                       women’s labor force participation rates (the percentage of the population
                       aged 16 and older who are working or actively seeking employment) are
                       lower than men’s at every age. Women’s labor force participation rates
                       have increased substantially over the past 35 years, growing from just
                       38 percent in 1960 to 60 percent in 1997. At the same time, the rate for men
                       fell from 83 percent to 75 percent. Both trends have leveled off since the
                       early 1990s. The difference in labor force participation has implications for

                        In addition, the program also provides benefits for the children of retired and deceased workers and
                       for disabled workers and their dependents.
                        Covered earnings are earnings subject to the Social Security payroll tax, up to $72,600 for 1999.

                       Page 2                                                                             GAO/T-HEHS-99-52
                      Social Security Reform: Implications for

                      women’s Social Security benefits relative to men’s, since under the current
                      rules Social Security calculates monthly benefits on the basis of lifetime
                      taxable earnings averaged over a worker’s 35 years of highest earnings.
                      Because women generally spend more time out of the labor force than
                      men (primarily for reasons associated with child rearing), they have fewer
                      years of taxable earnings; thus, more years with zero earnings are included
                      in calculating their benefits. Even if women and men had identical annual
                      earnings when they both worked, women’s shorter time spent in the labor
                      force results in lower average lifetime earnings, which in turn leads to
                      lower retirement benefits. In 1993, the average 62-year-old man had
                      worked 36 years, whereas the average 62-year-old woman had worked
                      only 25 years.4 Almost 60 percent of these 62-year-old men had a full 35
                      years of covered earnings compared with less than 20 percent of women.

                      A second cause of lower lifetime earnings is women’s lower wage rates. In
                      part, this reflects the fact that women are more likely to work part-time,
                      and part-time workers tend to earn lower wages than full-time workers.
                      However, even if only year-round, full-time male and female workers are
                      compared, the median earnings for women are still less than 75 percent of
                      men’s. The gap narrows when differences in education, years of work
                      experience, age, and other relevant factors are taken into account.

                      The changes contained in various Social Security reform proposals would
How Women Might Be    likely have a disproportionate effect on women. Many reform proposals
Affected by Various   include provisions that would reduce current benefit levels, for example,
Reform Proposals      reductions in the cost-of-living adjustment and increases in the normal or
                      early retirement ages. Reducing all benefits proportionately would hit
Within the Existing   hardest those who have little retirement income other than Social
Program Structure     Security. Reducing Social Security benefits by, for example, 10 percent
                      would result in a 10-percent reduction in total retirement income for those
                      who have no other source of income but would cause only a 5-percent
                      reduction for those who rely on Social Security for only half their
                      retirement income. Women, especially elderly women, are more likely to
                      rely heavily, if not entirely, on Social Security. Among Social Security
                      beneficiaries aged 65 or older in 1996, about half the married couples,
                      two-thirds of the unmarried men, and three-fourths of the unmarried
                      women (who accounted for almost half of the three groups) relied on
                      Social Security for at least half their retirement income. One-fourth of the
                      unmarried women relied on Social Security for all their retirement income.

                       These data include only earnings from 1951 to the year the worker reached age 61.

                      Page 3                                                                          GAO/T-HEHS-99-52
Social Security Reform: Implications for

Other changes could exacerbate existing disadvantages for some women.
For example, some proposals would extend the period for computing
benefits from 35 years to 38 or 40 years. Because most women do not have
even 35 years with covered earnings, increasing the computation period
would increase the number of years with zero earnings used in calculating
their benefits and, thus, lower their average benefit. The Social Security
Administration (SSA) forecasts that fewer than 30 percent of women
retiring in 2020 will have 38 years of covered earnings, compared with
almost 60 percent of men. SSA estimates that extending the computation
period to 38 years would reduce women’s benefits by 3.9 percent, while
extending the period to 40 years would reduce their benefits by
6.4 percent. The comparable impact on men from an extension to 38 or 40
years is 3.1 percent and 5.2 percent, respectively.5

Some reform proposals include a specific provision designed to improve
the status of survivors, who are predominantly widows, but
simultaneously reduce spousal benefits that generally accrue to women.
Under the current system, a retired worker’s spouse who is not entitled to
benefits under her own work records will receive a benefit up to
50 percent of her husband’s benefit and a widow will receive up to
100 percent of her deceased husband’s benefit. One proposal would
reduce the spousal benefit from 50 percent to 33 percent of the worker’s
benefit but would increase the survivor’s benefit to either 75 percent of the
couple’s combined benefit or 100 percent of the worker’s benefit,
whichever is greater. One-earner couples would receive reduced lifetime
benefits because the spousal benefit would be reduced while both the
retiree and spouse were alive, but the survivor benefit would remain the
same as under current law. Two-earner couples would lose some benefits
while both were alive if one spouse was dually entitled,6 but the survivor
would receive higher benefits than under current law.

 These percentages are based on a sample of new awards in 1993.
 A person who is dually entitled receives a retired-worker benefit based on his or her own earnings but
is entitled to a higher spousal or survivor benefit based on the earnings of a current or former spouse.
The dually entitled beneficiary receives the benefit based on his or her own work record plus the
difference between that benefit and the higher spousal or survivor benefit.

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                          Social Security Reform: Implications for

                          Many reform proposals would fundamentally restructure Social Security
How Women Might           by creating retirement accounts that would be owned and managed by
Fare Under a System       individuals. While such accounts can increase benefits for retirees, women
Restructured to           on average might not reap the same advantages such an investment could
                          bring to men. As stated earlier, the difference is partly the result of women
Include Individual        having shorter work histories and lower earning levels, which suggests
Accounts                  they generally will contribute less to these accounts. The difference is also
                          partly the result of differences in investment behavior.

Women Invest More         Economists have found evidence suggesting that women generally are
Conservatively Than Men   more risk averse than men in financial decisionmaking. Studies indicate
                          that, compared with men, women might choose a relatively low-risk
                          investment strategy that earns them lower rates of return for their
                          retirement income accounts. Although proponents argue that individual
                          accounts could raise retirement benefits for both sexes, an overly
                          conservative investment strategy could leave women with lower final
                          account balances than men, even if both make the same contributions.
                          Thus, even though women could improve their financial situation under a
                          retirement system that included individual accounts, the gap between the
                          benefits received by men and women could increase.

                          In our December 1997 report, we attempted to calculate the difference in
                          risk aversion between men and women by looking specifically at the
                          differences in how unmarried men and women who were nearing
                          retirement age invested their assets. We examined unmarried individuals
                          because it was not possible to determine who made investment decisions
                          in married households. We found that women aged 51 to 61 in 1992 had a
                          lower percentage of their total assets in stocks, mutual funds, and
                          investment trusts than men did. The returns on these assets are more
                          volatile but potentially higher yielding than others, such as certificates of
                          deposit, savings accounts, or government bonds.7 On average, we found
                          that the ratio of riskier assets to total assets held by men was 8 percentage
                          points higher than the same ratio for women. Other researchers, looking at
                          participants in the federal Thrift Savings Plan, have also found that women

                           Total assets included non-housing equity from checking and savings accounts, money market funds,
                          certificates of deposit, government bonds, Treasury bills, individual retirement accounts, KEOGHs,
                          stocks, mutual funds, investment trusts, business equity, bonds, bond funds and other assets, and
                          housing equity.

                          Page 5                                                                         GAO/T-HEHS-99-52
                             Social Security Reform: Implications for

                             invest less in stocks than men.8 Our analysis, using different data and
                             focusing on individuals in their prime working and saving years, increases
                             the robustness of this conclusion. By investing less in these riskier assets,
                             women benefit less from the potentially greater rates of return that, in the
                             long run, stocks could generate. At the same time, however, they are not
                             as exposed to large losses from riskier assets. While it is true that in the
                             past U.S. stocks have almost always posted higher returns than less risky
                             assets, there is no guarantee that they will always do so.

                             Some pension specialists believe that information is a critical factor in
                             helping individuals make the most of their retirement investments.
                             Providing investors with information that covers general investment
                             principles and financial planning advice might help both women and men
                             to better manage their investments and close the gap in the average
                             investment returns received by men and women. While employers are not
                             legally required to provide this type of information, many have done so in
                             the case of 401(k) accounts. It is not clear who would provide such
                             information to workers under a restructured Social Security system that
                             included mandatory individual accounts. The nature and extent of such
                             information and education efforts, when combined with the design of
                             related investment options, are likely to help maximize the effectiveness
                             of, and minimize the risk associated with, individual accounts under the
                             Social Security system.

Annuitization Choices Will   How individual account accumulations are paid out will also make a
Affect Retiree’s Benefits    difference in retirement income for many women. Unless otherwise
                             specified, workers could choose to receive their individual account
                             balances at retirement as a lump-sum payment, as some pension plans
                             now allow, to spend as they see fit. If retirees and their spouses do not
                             accurately predict their remaining life spans and consume their account
                             balances too quickly, they may end up with very small incomes late in life.

                             To preserve retirement income, retirees could be required to convert the
                             capital accumulations in their individual accounts to a lifetime annuity.
                             However, men and women could retire with similar amounts in their

                              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
                             Twenty-First Century, ed. by Michael S. Gordon, Olivia S. Mitchell, and Marc M. Twinney
                             (Philadelphia, Penn.: University of Pennsylvania Press, 1997); Vickie L. Bajtelsmit, Alexandra
                             Bernasek, and Nancy A. Jianakoplos, “Gender Differences in Pension Investment Allocation
                             Decisions,” Working Papers in Economics and Political Economy, Department of Economics,
                             Colorado State University (Oct. 1996); and James M. Poterba and David A. Wise, “Individual Financial
                             Decisions in Retirement Saving Plans and the Provision of Resources for Retirement,” National Bureau
                             of Economic Research Working Paper No. 5762 (Sept. 1996).

                             Page 6                                                                         GAO/T-HEHS-99-52
Social Security Reform: Implications for

individual accounts and still end up with very different monthly benefits if
they were to purchase annuities and if the annuities were based on
gender-specific life tables.9 Insurance companies that sell annuities usually
take into account women’s longer life expectancy and either provide a
lower monthly benefit to women or charge women more for the same level
of benefits given to men. In the case of employer-provided group annuities,
gender-neutral life tables must be used in the calculation of monthly
benefits, which ensures equal benefits for men and women with the same
lifetime earnings.10 Requirements to use gender-neutral life tables involve
cross-subsidies between men and women.

Insurance companies also pay lower benefits for a joint and survivor
annuity that covers both husband and wife than for a single life annuity
that covers only the worker during his or her lifetime—again because the
total time in which the benefits are expected to be paid is longer. Women
are more likely to receive the survivor portion of this type of annuity, since
they are more likely to outlive their husbands. Thus, while the total
lifetime annuity benefits for men and women may be similar, the monthly
benefit women receive, either as retirees or as survivors, will likely be
lower and could result in a lower standard of living in retirement.11

Other groups of women will also need to be considered if individual
accounts are introduced. Under current Social Security provisions,
divorced spouses and survivors are entitled to receive benefits based on
their former spouse’s complete earnings record if they were married at
least 10 years. Most of those receiving benefits under this provision are
women. Many individual retirement account proposals do not
acknowledge divorcees and survivors as having any specific claim on the
individual accounts of their former spouses. Under these proposals, the
current automatic provision of these benefits would be eliminated. The
money in these accounts could become a part of the settlement at the time
of a divorce, but the current benefit guarantee to these benefits might be

Mandating the purchase of a joint and survivor annuity with the individual
account balances at retirement will reduce the risk that some wives will
have little to live on if they outlive their husbands. Requiring the use of

 An annuity can be single life, for the lifetime of the worker only, or joint and survivor, for the lifetime
of the annuitant and his or her designated survivor.
    That is, same-aged men and women would receive identical annuity benefits for the same price.
 Some demographers believe that life expectancy will continue to increase in the future, affecting
annuity values. However, it is unclear whether the gap between the life expectancy of men and women
will also narrow in the future.

Page 7                                                                                GAO/T-HEHS-99-52
              Social Security Reform: Implications for

              gender-neutral life tables would create cross-subsidies between men and
              women. However, doing so could protect retired women against a lower
              living standard that would result simply because they usually live longer
              than men. The needs of former spouses will also need to be considered in
              developing individual accounts.

              While the Social Security system has benefited women significantly
Conclusions   through the spousal benefit and the progressivity of the benefit formula,
              women generally receive lower Social Security benefits than men because
              they work fewer years and earn lower wages. These work and earnings
              characteristics will affect the relative changes in average benefits for men
              and women under some reform proposals. In particular, these
              characteristics will work against women should reforms based on years
              with covered earnings be enacted. Because of women’s longer life
              expectancy, the creation of mandatory individual retirement accounts
              could also decrease women’s benefits relative to men’s if women continue
              to invest more conservatively than men. Women might also be
              disadvantaged if the accumulations in these accounts are paid as a lump
              sum rather than as a joint and survivor annuity based on gender-neutral
              life tables.

              Whether reforms include relatively modest modifications to the current
              system or more major restructurings that could include mandatory
              individual retirement accounts, some elements of the reform proposals
              could adversely affect many elderly women. Because elderly women are at
              risk for living in poverty, understanding how various elements of the
              population will be affected by different changes will be necessary if we are
              to protect the most vulnerable members of our society.

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

(207056)      Page 8                                                      GAO/T-HEHS-99-52
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