Jan L. Warner & Jan Collins
Social Security Reform: Implications for the Financial Well-Being of Women (Testimony, 04/10/97 Before the Subcommittee on Social Security, Committee on Ways and Means, House of Representatives, GAO/T-HEHS-97-112).
Excerpted from Statement of Jane L. Ross, Director Income Security Issues, Health, Education, and Human Services Division GAO/T-HEHS-97-112, GAO/HEHS-97-112THere, the Government Accounting Office (GAO) discusses the impacts of proposals to finance and restructure the Social Security system, specifically the impacts on the financial well-being of women.
GAO noted that: (1) its work shows that, despite the provisions of the Social Security Act that do not differentiate between men and women, women tend to receive lower benefits than men; (2) this is due primarily to differences in lifetime earnings because women tend to have lower wages and fewer years in the workforce; (3) women's experience under pension plans also differs from men's not only because of earnings differences but also because of differences in investment behavior and longevity; (4) moreover, public and private pension plans do not offer the same social insurance protections that Social Security does; (5) furthermore, some of the provisions of the Social Security Advisory Council's three proposals may exacerbate the differences in men and women's benefits; (6) for example, proposals that call for individual retirement accounts will pay benefits that are affected by investment behavior and longevity; and (7) expected changes in women's labor force participation rates and increasing earnings will reduce but probably not eliminate these differences.
"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 containspreliminary findings from a report being prepared at the request of the Ranking Minority Member of the Subcommittee. 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 Securitydoes. 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 behavior and longevity. Expected changes in women's labor force participation rates and increasing earnings will reduce but probably not eliminate these differences."
After the 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).
DEMOGRAPHIC CHARACTERISTICS AND LABOR MARKET ATTACHMENT AFFECT RETIREMENT INCOME FOR MEN AND WOMEN DIFFERENTLY
Over their lifetimes, men and women differ in many ways that have consequences for how much they will receive from Social Security and pensions. Women make up about 60 percent of the elderly population and less than half of the Social Security beneficiaries who are receiving retired worker benefits, but they account for 99 percent of those beneficiaries who receive spouse or survivor benefits. A little less than half of working 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 men and women in pension coverage are magnified for those workers nearing retirement age--over 70 percent of men are covered compared with about 60 percent of women.
LABOR FORCE PARTICIPATION AND EARNINGS DIFFER FOR MEN AND WOMEN
Labor force participation rates differ for men and women, with men being more likely, at any point in time, to be employed or actively seeking 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 willnarrow 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. The lower labor force participation of women leads to fewer years with covered earnings on which Social Security benefits are based. 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 lessthan 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 womenare 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.
LIFE EXPECTANCIES DIFFER FOR MEN AND WOMEN
Women tend to live longer than men and thus may spend many of their 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 CONSERVATIVELY THAN MEN
Many pension plans give participants responsibility for managing the 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 toinvest more of their pension funds in safer but lower yielding assets, such as government bonds. The results of a recent study of the federal Thrift Savings Plan indicate that men are much more likely to invest in the stock fund than are 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.
PENSION PLAN PROVISIONS OFFER DIFFERENT BENEFITS FROM SOCIAL SECURITY
Social Security provisions and pension plan provisions differ in several ways: Under Social Security, the basic benefit a worker receives who retires at the normal retirement age (NRA)8 is based on the 35 years with the highest covered earnings. The formula is progressive in that it guarantees that higher-income workers receive 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, andsalary averaged over some number of years. 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. Typically, at retirement, workers receive a joint and survivor annuity thatprovides 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 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 againstinflation 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 DIFFER UNDER SOCIAL SECURITY AND PENSIONS
Under Social Security, the dependents of a retired worker may be eligible to receive benefits. For example, the spouse of a retired worker is eligible 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. Theretired 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 retiringworker's spouse directly into the decision-making process concerning benefit 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 thatthey 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 givetheir 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.