Social Security Reform: Implications for Women's Retirement Income
(Letter Report, 12/31/97, GAO/HEHS-98-42).
Pursuant to a congressional request, GAO reviewed the issue of social
security reform and women's retirement income, focusing on: (1) why
women's benefits are lower than men's under the current social security
system; (2) the possible differential effects on women of the new
privatization reform proposals; and (3) what can be done to minimize the
possibly negative effect on women of certain elements of the social
security reform proposals.
GAO noted that: (1) women's average social security benefits are lower
than men's for a number of reasons, most of which relate to women's
lower rates of labor force participation and lower earnings levels; (2)
although the 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; (3) the reform
proposals that would create individual private savings accounts and
change the way benefits would be distributed from those accounts are the
most likely to affect women and men differently; (4) a retirement income
system that is based in large part on mandatory contributions of a fixed
percentage of earnings and on individuals' making their own investment
decisions could lead to women's receiving relatively lower benefits than
man; (5) working women earn less than men, on average, and therefore
would have fewer funds to invest in their individual accounts; (6) GAO's
analysis of women in their prime earning and saving years suggests that
they are less likely than men to invest in potentially higher yielding,
though riskier, assets such as stocks, which would generally leave them
at risk of having accumulated relatively less in their accounts at
retirement; (7) even if men and women enter retirement with equal
amounts in their individual accounts, women may receive a lower monthly
benefit if they buy an individual annuity--a monthly benefit for the
life of the worker or the worker and a spouse--because it is adjusted
for their greater longevity; (8) changes over time in women's labor
force behavior and experience are projected to reduce, but not
completely eliminate, the differences in men's and women's labor force
participation rates and earnings; (9) any reform of the system that
bases benefits on earnings will continue to produce different benefit
levels for men and women; (10) if a reformed Social Security system were
to rely largely on individual investment, better education about
investment strategies and general financial principles might help women
workers increase their retirement benefits; (11) in addition, requiring
that retirement savings be annuitized would be better protect dependent
spouses; and (12) annuities purchased with individual account balances
might give rise to differential benefit levels for men and women with
the same level of lifetime earnings because women are charged higher
annuity prices, based on their longer average lifespan.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: HEHS-98-42
TITLE: Social Security Reform: Implications for Women's Retirement
Income
DATE: 12/31/97
SUBJECT: Social security benefits
Retirement benefits
Labor force
Elderly persons
Social security taxes
Investment planning
Pensions
Privatization
Women
IDENTIFIER: Social Security Program
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Cover
================================================================ COVER
Report to the Ranking Minority Member, Subcommittee on Social
Security, Committee on Ways and Means, House of Representatives
December 1997
SOCIAL SECURITY REFORM -
IMPLICATIONS FOR WOMEN'S
RETIREMENT INCOME
GAO/HEHS-98-42
Women and Social Security Reform
(207450)
Abbreviations
=============================================================== ABBREV
ERA - early retirement age
HRS - Health and Retirement Study
IRA - individual retirement account
OASI - Old Age and Survivors Insurance
NRA - normal retirement age
PIA - primary insurance amount
PIP - Personal Investment Plan
PRA - personal retirement account
PTA - Personal Thrift Account
SSA - Social Security Administration
Letter
=============================================================== LETTER
B-276168
December 31, 1997
The Honorable Barbara Kennelly
Ranking Minority Member
Subcommittee on Social Security
Committee on Ways and Means
House of Representatives
Dear Ms. Kennelly:
Increasing longevity and falling birth rates over the past 50 years
have led to a growth in the elderly's share of the U.S. population.
The share that is 65 and older is expected to continue to increase
from 13 percent of the total U.S. population today to 20 percent by
2050. This demographic change has led to a serious long-term
financing problem for the Social Security system. Although Social
Security currently has more revenue than expenditures, over the next
75 years revenues are projected to be about 14 percent less than
total projected expenditures.
Several different reform plans have been proposed to address the
financing problem, and all would affect the financial well-being of
current and future beneficiaries. Some current beneficiaries,
especially older unmarried women, are already experiencing higher
poverty rates than other groups in the aged population and may be
increasingly vulnerable if particular options are selected.
On April 10, 1997, we testified before the House Ways and Means
Subcommittee on Social Security on the issue of Social Security
reform and women's retirement income. Subsequently, you asked us to
extend our analysis of the effect of the various reform proposals on
women. Specifically, you asked us to evaluate (1) why women's
benefits are lower than men's under the current Social Security
system, (2) the possible differential effects on women of the new
privatization reform proposals, and (3) what can be done to minimize
the possibly negative effect on women of certain elements of the
Social Security reform proposals.
To evaluate these issues, we reviewed the literature on women's labor
force participation and earnings, spoke with Social Security and
insurance industry analysts, analyzed data on individual annuity
benefits for men and women, and conducted an econometric analysis to
estimate the relative levels of risk aversion of men and women. We
performed our work between April and October 1997 in accordance with
generally accepted government auditing standards. For more details
about our methodology, see appendix I.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
Women's average Social Security benefits are currently lower than
men's for a number of reasons, most of which relate to women's lower
rates of labor force participation and lower earnings levels.\1 Both
years of earnings and earnings levels enter into the calculation of
Social Security benefits. Although the 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.
The reform proposals that would create individual private savings
accounts and change the way benefits would be distributed from those
accounts are the most likely to affect women and men differently. A
retirement income system that is based in large part on mandatory
contributions of a fixed percentage of earnings and on individuals'
making their own investment decisions could lead to women's receiving
relatively lower benefits than men. Working women earn less than
men, on average, and therefore would have fewer funds to invest in
their individual accounts. Researchers have found that women in
general are more risk-averse investors than men. Our analysis of
women in their prime earning and saving years suggests that they are
less likely than men to invest in potentially higher yielding, though
riskier, assets such as stocks, which would generally leave them at
risk of having accumulated relatively less in their accounts at
retirement. Moreover, even if men and women enter retirement with
equal amounts in their individual accounts, women may receive a lower
monthly benefit if they buy an individual annuity--a monthly benefit
for the life of the worker or the worker and a spouse--because it is
adjusted for their greater longevity.
Changes over time in women's labor force behavior and experience are
projected to reduce, but not completely eliminate, the differences in
men's and women's labor force participation rates and earnings.
Thus, any reform of the system that bases benefits on earnings will
continue to produce different benefit levels for men and women. If a
reformed Social Security system were to rely largely on individual
investments, better education about investment strategies and general
financial principles might help women workers increase their
retirement benefits. In addition, requiring that retirement savings
be annuitized would better protect dependent spouses. Finally,
annuities purchased with individual account balances might give rise
to differential benefit levels for men and women with the same level
of lifetime earnings because women are charged higher annuity prices,
based on their longer average lifespan. One possible option for
addressing this concern is the use of the same unisex annuity tables
that are currently required for employer-provided group annuities.
--------------------
\1 The rate of labor force participation is defined as the percentage
of all women aged 16 and older who are working or actively seeking
employment.
BACKGROUND
------------------------------------------------------------ Letter :2
Social Security is a retirement income program whose benefits are
based, in part, on an individual's earnings. Social Security is also
gender-neutral--that is, a man and a woman whose labor force
participation and earnings are identical, in terms of both extent and
timing, will receive the exact same Social Security benefit. When
calculating actual benefits, Social Security employs a progressive
benefit formula that replaces a relatively larger portion of lifetime
earnings for people with low earnings than for people with high
earnings. Because women tend to have lower lifetime taxable earnings
than men, they generally benefit from this provision.\2 The program
also provides benefits to retirees' dependents (such as spouses,
ex-spouses, children, and survivors).\3 Many more women than men
receive dependent benefits as spouses or survivors. Unlike some
pension benefits, these benefits are automatic for all eligible
dependents and do not depend on the worker's electing to include
them. In general, a retired worker's spouse who is not entitled to
benefits under his or her own work record will receive a benefit up
to as much as 50 percent of the retired worker's benefit, and a
surviving spouse will receive up to as much as 100 percent of the
deceased worker's benefit.\4 A spouse's receiving dependent benefits
does not reduce the size of the worker's own benefit.
Social Security has helped reduce poverty rates for the elderly, from
35 percent in 1959 to less than 11 percent in 1996. Nevertheless,
some subgroups of the elderly population are at a greater risk of
living in poverty than others. Unmarried women make up more than 70
percent of poor elderly households, although they constitute only 45
percent of all elderly households. Single, divorced, and widowed
women aged 65 or older have a poverty rate of 22 percent, compared
with 15 percent for unmarried men and 5 percent for married couples
older than 65.\5 In addition, some researchers expect the current
level of poverty among widows to persist over the next 20 years
because there will still be a substantial number of women with a
history of low earnings and intermittent labor force attachment whose
own worker benefit will not be greater than their widow's benefit.
In part, because of the anticipated increase in the size of the
elderly population and the growing proportion of the total population
that the elderly will constitute over the next 33 years, Social
Security's trust funds are projected to be depleted by 2029. A
number of proposals have emerged to resolve this difficulty, with a
great deal of variety in terms of both how the Social Security
program would be structured and who would be eligible for benefits.
Appendix II summarizes the key features of the major proposals.
Among the various proposals for restoring long-term financial balance
to the Social Security system are several that call for some degree
of privatization.\6 Some of these privatization proposals would
redesign the Social Security system, patterning it, in part, after
some private sector pension plans, such as 401(k) plans. Under such
a system, a portion of workers' Social Security taxes would be
deposited in an investment account that they would then control. By
investing in stocks or other assets, workers could increase their
retirement savings and potentially increase their retirement
benefits. However, they could also lose some portion of their
savings for retirement if, for example, stock prices fell. While the
data indicate that the U.S. stock market has historically
outperformed the implicit return expected from Social Security for
today's and future retirees, there is always a risk of loss. The
uncertainty of market gains or losses would be borne by the
individual, and the individual's retirement income would not be
guaranteed by the government as it currently is under Social
Security.\7
Retirees could use the payout from individual accounts to buy an
annuity, or they could receive a lump-sum distribution of the
accumulated savings to manage or spend as they saw fit. In most
cases, an annuity lasts for the life of the recipient, removing the
risk that retirees will outlive their savings. With a lump sum,
retirees may make other choices about the distribution of their
assets, including, at their death, bequeathing any remaining funds to
their heirs.
--------------------
\2 Taxable earnings are earnings on which Social Security taxes are
paid.
\3 The program also provides benefits for disabled workers and their
dependents.
\4 A spouse or survivor who is entitled to benefits on his or her own
work record and on the record of a spouse (dually entitled) receives
his or her own retired-worker benefit or the spouse or survivor
benefit, whichever is higher.
\5 Data are from the U.S. Bureau of the Census and Susan Grad,
Income of the Population 55 or Older, 1994 (Washington, D.C.: Social
Security Administration, Office of Research and Statistics, 1996).
\6 Elements of other proposals that would affect women particularly
are discussed later in this report.
\7 In addition to worker's benefits, people receive benefits as
spouses or survivors. Issues related to the provision of dependent
benefits under the privatization proposals are discussed below under
"Costs of and Rules on Annuitization and the Effect on Women's
Benefits" and "Other Proposed Changes Could Differentially Affect
Women."
WOMEN'S BENEFITS DIFFER FROM
MEN'S BECAUSE OF LABOR MARKET
DIFFERENCES
------------------------------------------------------------ Letter :3
Women's Social Security benefits are currently lower, on average,
than men's because their labor force participation rates and earnings
are lower. These gaps are narrower than in past years yet still
large enough to affect retirement income benefits. The gaps are not
expected to disappear entirely, even in the long term.
LABOR FORCE ATTACHMENT AND
EARNINGS DIFFER FOR MEN AND
WOMEN
---------------------------------------------------------- Letter :3.1
Women's labor force participation rates continue to be lower than
men's at every age, despite substantial increases in women's rates in
the past 35 years. On average, the labor force participation rate
for women aged 16 and older in 1996 was 59 percent, compared with 75
percent for men. As seen in figure 1, this represents a significant
increase for women from 35 years ago, when their labor force
participation rate was only 38 percent, compared with 83 percent for
men.
Figure 1: Labor Force
Participation Rates, 1950-96
(See figure in printed
edition.)
Source: Department of Labor, Bureau of Labor Statistics.
Figure 2 shows the change in labor force participation rates for
women born in different 5-year intervals as they move through their
prime-age years (25 to 54). Women born more recently have higher
labor force participation rates than older women had at the same age.
The labor force participation rates of the younger women do not drop
off during their child-bearing years as the older women's did, but
the rate of increase in labor force participation for the younger
women has slowed. Women today are much more likely to participate in
the labor force than in previous generations, but their rate of
participation is still below the rate for men.
Figure 2: Labor Force
Participation Rates of Women
for 5-Year Age Groups
(See figure in printed
edition.)
Note: Interior years are birth years.
Source: Theresa J. Devine, "Demographics, Social Security Reform
and Labor Supply," forthcoming in Social Security Reform: Links to
Savings, Investment and Growth, Conference Series No. 41 (Boston,
Mass.: Federal Reserve Bank of Boston, 1997).
The difference in labor force participation has implications for
women's level of 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. Women generally spend more time out of
the labor force than men and have fewer years of taxable earnings, so
the calculation of their benefit includes more years with zero
earnings. The median number of years with zero earnings for workers
turning 62 in 1993 was 4 for men and 15 for women. This results in
lower monthly benefits for women relative to men.
Women also earn lower wages than men, although some of this
difference can be explained by the fact that women more often work
part-time. However, even in a comparison of year-round, full-time
workers, median earnings for women are still only about 70 percent of
men's. This difference further narrows when differences in
education, work effort, age, and other relevant characteristics are
accounted for, but even then the gap does not close completely, with
women earning wages that are 15- to 20-percent lower than men's.
These differences in earnings lead to lower Social Security benefits
for women relative to men. In 1995, the average monthly benefit for
retired workers was $621.30 for women and $810.00 for men; women's
average benefit was 77 percent that of men's. Even if earnings for
men and women and their labor force participation behavior were
equalized starting today, women would continue to have lower benefits
than men until the 2030s because earnings are averaged over 35 years;
it would take that long for benefits to be equalized.
Neither the difference between men's and women's labor force
participation rates nor the gap in their earnings is expected to
disappear in the foreseeable future. As figure 2 shows, the
long-term upward trend in women's labor force participation rates has
flattened out in recent years. The decline in men's labor force
participation is also leveling off, making it less likely that women
will have the same rate as men. Because a 15-to-20-percent gap in
earnings between men and women remains even after accounting for
demographic and labor force characteristics, it is likely that the
gap will not close completely. Since retirement income benefits are
based on both amount of earnings and number of years in the labor
force, the gap will continue to produce lower benefits, on average,
for women than for men. Over the course of their retirement, women
might receive benefits for a longer period of time than men because
they live longer, but they will not necessarily receive more in total
lifetime benefits, and in any case, it is the monthly benefit that is
most important to the retiree's standard of living.
SOME ELEMENTS OF PRIVATIZATION
PROPOSALS COULD HAVE A
DIFFERENTIAL EFFECT ON WOMEN
------------------------------------------------------------ Letter :4
Establishing individual savings accounts for every worker and
providing benefits in a lump-sum are two of the most important
proposed reforms that could affect women and men differently. Other
elements of the reform proposals might also affect men and women
differently, although the effects may be relatively small or may
pertain only to certain subgroups, such as divorced women.
WITH INDIVIDUAL ACCOUNTS,
WOMEN MAY FARE WORSE THAN
MEN BECAUSE THEY ARE MORE
RISK AVERSE
---------------------------------------------------------- Letter :4.1
Many of the reform proposals call for the creation of mandatory
savings accounts that allow workers to make their own investment
decisions. One consequence of this move might be that individuals
would decide to take on more risk in order to earn potentially higher
rates of return. Economists have found evidence suggesting that
women are generally more risk averse than men in financial
decisionmaking. Compared with men, they might choose an investment
strategy for their retirement income accounts that earns them lower
rates of return. Although proponents argue that privatization could
allow for higher retirement benefits for both men and women, a
too-conservative investment strategy could leave women with lower
final account balances than men, even if both make the same
contributions to their accounts. In reality, women's lower average
earnings will result in their making smaller average contributions to
their accounts than men will make. Thus, even though women could be
better off under a privatized system, compared to the current Social
Security system, the gap between men's and women's benefits could
increase.
We attempted to calculate the difference in risk aversion between men
and women by looking specifically at the differences in how men and
women invest their assets.\8 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. These assets are riskier,
but potentially higher yielding, than others, such as certificates of
deposit, savings accounts, or government bonds.\9 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 invest less in stocks than men
do.\10 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, 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.
--------------------
\8 We used data from the Health and Retirement Study and controlled
for demographic characteristics, wealth, and income. See appendix I
for a discussion of our methodology.
\9 Total assets included nonhousing equity from checking and savings
accounts, money market funds, certificates of deposit, government
bonds, Treasury bills, individual retirement accounts (IRA), KEOGHs,
stocks, mutual funds, investment trusts, business equity, bonds, bond
funds and other assets, and housing equity.
\10 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: 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, October 1996;
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, September 1996.
COSTS OF AND RULES ON
ANNUITIZATION AND THE EFFECT
ON WOMEN'S BENEFITS
---------------------------------------------------------- Letter :4.2
Some proposals for reforming Social Security would not require
retirees to purchase an annuity with the funds in their retirement
income accounts. At retirement, workers could choose to receive
their account balance 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 lifespans or make poor
investment choices, they may end up with very small incomes from
assets late in life.
Most married women with little work history of their own currently
receive a Social Security benefit as a dependent, based on their
husband's earnings. Under Social Security, the distribution of
benefits to dependents does not reduce a worker's benefit and they
are mandatory, so that no worker can opt out of providing them. In
contrast, some of the privatization proposals do not automatically
provide dependent benefits from the investment portion of the
retirement income accounts. Workers may choose not to purchase an
annuity at all, or they may choose a single life annuity that ends at
the worker's death. Either of these options would put dependent
wives at greater risk of having little to live on should their
husbands die first.
While some retirees might prefer to avoid the cost of an annuity,
receiving their account balance as a lump-sum payment to manage as
they see fit, others might prefer the security of a guaranteed
monthly income for life that an annuity provides and therefore choose
to purchase one. However, a man and a woman could retire with
similar amounts in their personal accounts under a privatized social
security system and still end up with very different monthly benefits
if they were to purchase an annuity.\11 Annuities sold to individuals
are usually based on gender-specific life tables. That is, insurance
companies 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.\12 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 men's
and women's total lifetime benefits may be similar, the monthly
benefit women receive, either as retirees or as survivors, will
likely be lower.\13
Table 1 shows the average monthly benefit paid to men and women at
different ages, based on a $100,000 premium, for both single life and
joint and full survivor options.\14 At every age, a man's monthly
benefit under a single life option is between 8 and 13 percent higher
than a woman's.
Table 1
Individual Single Life and Joint and
Full Survivor Monthly Benefits on a
$100,000 Premium Annuity
Joint and full
Single life survivor
-------------------------- ----------------
Man and woman at
Age Man Woman same age
------------ ------------ ------------ ----------------
60 $697 $643 $590
65 772 700 631
70 880 781 690
----------------------------------------------------------
Source: Data are the average of benefits from 111 insurance
companies listed in A.M. Best Company, Best's Policy Reports, Single
Premium Immediate Annuities, Special Edition: 1997 (Oldwick, N.J.:
1997).
This comparison of average benefits masks significant differences
between insurance companies. Table 2 shows for men and women
separately, at each age, the highest and lowest monthly benefit paid
for a $100,000 premium in a single life plan. While men and women
differ little in terms of the variation in monthly benefits, the
lowest possible benefit paid to a woman is still lower than the
lowest benefit paid to a man of the same age, and the highest
possible benefit paid to a woman is also lower than the highest paid
to a man.
Table 2
Range in Monthly Benefits From an
Individual Single Life $100,000 Premium
Annuity
Men Women
------------------ ------------------
Age Highest Lowest Highest Lowest
------------------------------ -------- -------- -------- --------
60 $771 $577 $722 $522
65 856 653 796 579
70 988 734 871 646
----------------------------------------------------------------------
Source: Data taken from 111 insurance companies listed in A.M. Best
Company, Best's Policy Reports, Single Premium Immediate Annuities,
Special Edition: 1997 (Oldwick, N.J.: 1997).
The difference in annuity benefits for men and women exists only for
individual annuities. A 1983 Supreme Court ruling requires that
employer-provided pension plans use a unisex life table in
calculating annuities, so that women and men receive the same monthly
benefit.\15 Federal, state, and local pension plans also use unisex
life tables in calculating monthly annuity benefits. The market for
individual annuities, however, is not covered by the Supreme Court
ruling, and it is unclear whether or not annuities purchased from
retirement savings accounts in a reformed Social Security system
would be covered by the Court ruling.\16
--------------------
\11 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.
\12 In the case of employer-provided group annuities, unisex life
tables must be used in the calculation of monthly benefits, which
ensures equal benefits for men and women with the same lifetime
earnings.
\13 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 narrow in the future as well.
\14 Under a full survivor option, the survivor receives 100 percent
of the annuitant's monthly benefit for life.
\15 Arizona Comm. for Deferred Compensation Plans v. Norris, 463
U.S. 1073 (1983).
\16 There is some concern about whether insurance companies would
offer individual annuities for women if they were required to use
unisex tables.
OTHER PROPOSED CHANGES COULD
DIFFERENTIALLY AFFECT WOMEN
---------------------------------------------------------- Letter :4.3
Other proposed changes in various Social Security reform proposals
would differentially affect women, although the effects might not be
as far-reaching and in some cases could even be beneficial. Some
reform proposals require Social Security to extend the computation
period for benefits from 35 years to 38 or 40 years. For women, with
their lower rates of labor force participation giving them fewer
years of taxable earnings than men, increasing the computation period
would increase the number of zero years used in the calculation of
benefits, lowering their average benefit. The Social Security
Administration (SSA) forecasts that fewer than 30 percent of women
retiring in 2020 will have 38 years of taxable earnings, compared
with almost 60 percent of men. However, SSA has also calculated that
the difference in additional benefit reductions for men and women
would be relatively small: a 3.1-percent reduction for men compared
with a 3.9-percent reduction for women if the computation period were
38 years, and a 5.2-percent reduction for men compared with a
6.4-percent reduction for women if the computation period were
extended to 40 years.\17
Another of the reform proposals includes a provision designed to
improve the status of survivors, who are predominantly widows. This
provision decreases the spousal benefit while a retired worker is
alive (from 50 percent to 33 percent of the worker's benefit) and
increases the survivor's benefit to 75 percent of the couple's
combined benefit or 100 percent of the worker's benefit, whichever is
greater.\18 Another feature of this particular proposal, however,
would change the benefit formula for retired workers in a way that
would reduce the monthly benefit for most retired workers, disabled
workers, spouses, survivors, and children. Thus, the net effect of
these changes in spouse and survivor benefits will vary by individual
circumstances. While mandatory savings accounts are intended to
replace these lost benefits, it is not clear whose total benefits
would be maintained and whose would increase or decrease.
The effect of individual changes in the reform proposals could be
relatively minor. However, several taken together could interact
substantially. For example, cuts in spouse benefits and in the
benefit formula, combined with increases in years of taxable earnings
included in the computation period and increases in the normal
retirement age, could potentially add up to a large effect on women
relative to men.
Some groups of women may be at risk of receiving lower retirement
income benefits under some of the Social Security reform proposals,
and other groups may lose their eligibility for benefits entirely.
Under current Social Security law, divorced spouses are entitled to a
benefit based on the work record of their former spouse, if they are
aged 62 or older, had been married at least 10 years, and have not
remarried. Divorced survivors are entitled to a benefit based on the
work record of their former spouse if they are aged 60 or older and
had been married at least 10 years.\19 Under several of the reform
proposals that create mandatory savings accounts, divorced spouses
and divorced survivors are not acknowledged as having any claim at
all on the mandatory savings accumulated by their former spouse
during the period of their marriage. Under these proposals, the
current automatic provision of benefits would be eliminated. While
this money may become part of the settlement upon divorce, it is not
guaranteed under these proposals.
--------------------
\17 These percentages are based on a current sample of new awards in
1993.
\18 Whether or not individuals benefit from this provision depends on
whether women receive benefits based on their own work record or
their spouse's.
\19 Women are much more likely than men to receive benefits as a
divorced spouse or divorced survivor. As of December 1996,
approximately 425,000 women received benefits as a divorced spouse or
surviving divorced spouse.
DIFFERENTIAL EFFECTS COULD BE
MITIGATED
------------------------------------------------------------ Letter :5
The differential effects, both large and small, that many of the
Social Security reform proposals would create could be mitigated. In
some cases, participants in the program would simply need help in
understanding the new system and how to make it work for them. In
other cases, different policy options with regard to annuitization
would to varying degrees protect women as a whole or some subgroups,
such as dependent spouses.
INVESTOR EDUCATION MIGHT
NARROW THE DIFFERENCES IN
INVESTMENT BEHAVIOR
---------------------------------------------------------- Letter :5.1
To the degree that women are more risk averse than men, they might be
less likely to take full advantage of the potential benefits from
Social Security privatization. Some pension specialists believe that
education is a critical factor in helping individuals make the most
of their retirement investments. Preliminary evidence from a study
of 401(k) participants suggests that people who are given information
about their investment choices and potential returns are more likely
to participate in a 401(k) and to contribute a higher proportion of
their salaries than those who do not receive such information.\20
However, few, if any, studies have examined how education affects the
allocation decisions of 401(k) participants. Nevertheless, investor
education that covers general investment principles and financial
planning advice might help both men and women to better manage their
investments. While employers have provided this type of education in
the case of 401(k) accounts, it is not clear who the provider would
be in the case of individual retirement savings accounts under a
privatized Social Security system.
--------------------
\20 Robert L. Clark and Sylvester J. Schieber, Factors Affecting
Participation Rates and Contribution Levels in 401(k) Plans
(Washington, D.C.: Watson Wyatt Worldwide, May 1996).
GOVERNMENT ROLE IN ANNUITIES
PROVISION COULD MITIGATE
DIFFERENCES
---------------------------------------------------------- Letter :5.2
A variety of policy options may help preserve the protective aspects
of annuities, especially for women who are receiving dependent
benefits. These range from mandatory annuitization of all individual
accounts at retirement to partial annuitization, where some minimum
level of annuity purchase is mandatory but the balance of an
individual's account can be paid in a lump sum, to voluntary
annuitization with some government regulation of the market, such as
requiring the use of unisex life tables in calculating annuities.
Mandatory annuitization simply means that the balance in each
individual's account must be used to purchase an annuity at
retirement. Because everyone is in the same risk pool for insurance
purposes, the cost of annuities should be lower than if they were
purchased individually, and monthly benefit levels should be higher
for all annuitants. If annuities were also purchased under the
auspices of the federal government, gender-neutral life tables could
be used, so that men and women with the same account balance at
retirement would receive the same monthly benefit from their annuity.
In addition, by requiring married workers to purchase a joint and
survivor annuity, unless a spouse signs a waiver, a mandatory annuity
could protect women whose minimal work histories might make them
ineligible for a retired-worker benefit of their own.
Partial annuitization means that some portion of each individual's
account balance would be used to purchase an annuity, but the rest of
the money in the account could be paid out in a lump sum and spent as
the individual wished. Partial annuitization might also lead to the
use of gender-neutral life tables in the calculation of monthly
benefits, leading to equal benefits for women and men with comparable
lifetime earnings. And again, since all retirees would be in the
same risk pool, the cost of an annuity would probably be lower than
when purchased by an individual. The monthly benefits from these
annuities would be lower than under a full annuitization plan, since
they would not be using the entire account balance, but dependent
spouses would still benefit from the protection of having some
portion of their retirement income in the form of a joint and
survivor annuity.
Voluntary annuitization would leave the decision of whether to
purchase an annuity, and what type of annuity to purchase, up to each
individual. Under this plan, dependent spouses could lose the
protection that a mandatory joint and survivor annuity would provide.
Finally, under Social Security, the government ensures that men and
women retiring at the same age with the same earnings history receive
the same monthly benefits, despite the fact that women are expected
to live longer and will therefore receive benefits over a longer
period of time. The current approach provides equal living standards
for equal contributions. If individual annuities were provided under
gender-specific life tables, men and women with the same earnings
history would receive different monthly benefits but equivalent
expected lifetime benefits. The result would be that women's living
standards would be lower than men's despite the same contributions.
One option for mitigating this outcome is to use the same unisex life
tables that are currently required for employer-provided group
annuities for all annuitants.
CONCLUSIONS
------------------------------------------------------------ Letter :6
While the Social Security system is gender neutral in the way it
calculates benefits, women generally receive lower Social Security
benefits than men because they work fewer years and earn lower wages.
Some of the proposals to reform the Social Security system could
exacerbate the differences between men's and women's average
benefits. In particular, the creation of individual mandatory
savings accounts, and the change from an annuity to a lump-sum payout
of account balances at retirement, might decrease women's benefits
relative to men's. An awareness of these implications is important
in assessing these proposals.
However, there may be ways to mitigate some of these effects.
Information about investment principles and financial planning might
help minimize the differences in investment behavior between men and
women and improve retirees' ability to manage their assets.
Mandatory or partial annuitization might reduce the risk that some
wives will have little to live on when they outlive their husbands.
The use of unisex life tables could ensure equal monthly benefits for
men and women with comparable lifetime earnings.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :7
We received written comments from SSA on a draft of this report. SSA
staff also submitted technical comments, which we incorporated in the
report as appropriate. In its overall comments, SSA commended GAO
for outlining some of the concerns about the differential effects on
women of the new privatization reform proposals. SSA expressed
concern, however, that by focusing primarily on women as retired
workers, we had missed the effect of privatization on women as
dependents. We agree that the Social Security reform proposals have
important implications for dependent benefits, and we discuss their
impact in several places in the report. We paid special attention to
the effect of reform proposals on women receiving worker benefits of
their own, however, because under some privatization proposals,
dependent benefits may be a less important part of their retirement
income package. Women's lower rates of labor force participation and
earnings, the proposed changes in the calculation of the basic
worker's benefit, and risks related to the creation of individual
retirement accounts all have major implications for women's standard
of living in retirement relative to men's.
Three reviewers who are experts in the fields of social security and
pensions also made comments on a draft of this report, and we
incorporated them as appropriate.
---------------------------------------------------------- Letter :7.1
As we arranged with your office, unless you announce its contents
earlier we plan no further distribution of this report until 30 days
after the date of this letter. We will then send copies to the
Commissioner of Social Security and make copies available to others
on request.
This report was prepared under my direction. Please contact Francis
P. Mulvey, Assistant Director, at (202) 512-3592 or Alicia Puente
Cackley, Senior Economist, at (202) 512-7022 if you or your staff
have any questions.
Sincerely yours,
Jane L. Ross
Director, Income Security Issues
SCOPE AND METHODOLOGY
=========================================================== Appendix I
This appendix provides more detail about our analysis of gender
differences in the percentage of total assets invested in risky
assets and in individual annuity benefits. To conduct our work on
asset investment, we analyzed the first round of interviews from the
Health and Retirement Study (HRS), a longitudinal survey prepared by
the University of Michigan Survey Research Center. To conduct our
work on individual annuity benefits, we analyzed data from Best's
Policy Reports, an insurance information publication. We also
reviewed the relevant technical literature. We did not independently
verify the accuracy of HRS because it is commonly used by
researchers. We also did not independently verify the annuity data,
which are from a common source of information for the insurance
industry.
HEALTH AND RETIREMENT STUDY
The first wave of HRS was conducted in 1992. The sample was composed
of families in which at least one family member was between the ages
of 51 and 61. The survey asked the primary respondent and his or her
spouse questions regarding their current and past employment, family
asset holdings and debt, and demographic characteristics. From the
total sample of 12,652 respondents interviewed, we selected a
subsample of 2,371 single respondents (that is, never-married,
separated, divorced, or widowed). We excluded married couples from
our sample because we were particularly interested in differences
across gender, and within married couples we could not distinguish
which member of a couple was the decisionmaker on financial
issues.\21 We used sample weights throughout our analysis. The final
sample size was 1,414 individuals, after we deleted cases with
missing data. The advantage of using HRS is the detail of the data
on assets held by the individual, as well as the demographic and
household information. The major caveat to our analysis is that it
cannot be generalized to the population as a whole; it applies only
to the single population between the ages of 51 and 61 in 1992.
However, people of this age are particularly relevant for a study of
investment behavior since they are passing through their prime
earning and saving years and closing in on retirement age. We also
recognize that our results for this population may not accurately
predict the investment behavior of future cohorts.
The estimated model examines the effects of individual
characteristics, including gender, on the ratio of risky assets to
total assets held by the individuals. The multivariate regression
estimation technique used is a tobit model. The tobit model takes
into account the fact that the dependent variable is a ratio that is
bounded by 0 and 1. The model will not predict a ratio of risky
assets that is outside this range. Formally, the model can be
expressed as
Y\* = \/ X +
where the X vector contains independent variables; the
vector contains the parameters to be estimated; and is the
error term, assumed to be random, that captures the unobserved
factors influencing the dependent variable. The dependent variable,
the ratio of risky assets to total assets, is
Y = Y\* if 0 Y\* 1
Y = 0 if Y\* < 0
Y = 1 if Y\* > 1
CONSTRUCTION OF VARIABLES
The dependent variable is the ratio of risky assets to total assets
held by the respondent. Total assets included housing equity and
nonhousing equity such as checking and savings accounts, money market
funds, certificates of deposit, government bonds, Treasury bills,
IRAs, KEOGHs, stocks, mutual funds, investment trusts, business
equity, bonds, bond funds, and other assets. Our definition of risky
assets includes stocks, mutual funds, and investments trusts only.
The independent variables used in the analysis are a constant term,
age, age squared, education, race, gender, number of children living
at home or away at school, the natural log of annual income, and the
natural log of total net worth.
REGRESSION RESULTS
The coefficient estimates from the model of the investment in risky
assets are shown in table I.1. The coefficient estimates indicate
the effect of a change in an independent variable on an individual's
percentage of total assets that are classified as risky, holding
constant the values of all other independent variables. For example,
the coefficient estimate of 0.08 for the gender variable indicates
that men's ratio of risky assets to total assets is 8 percentage
points higher than women's.
Table I.1
Regression Results for the Determinants
of Investment Behavior
Coefficient
Independent variable estimate Standard error
-------------------------- -------------- --------------
Constant .89 4.59
Age (in years) -.10 .16
Age squared (in years) .00092 .0015
Education (in years) .03\a .006
Race (nonwhite = 1) -.09\b .04
Gender (male = 1) .08\a .03
Number of children -.006 .02
Natural log of annual .007 .02
income (dollars)
Natural log of net worth .10\a .01
(dollars)
\c .36\a .02
Log likelihood function -487.95
----------------------------------------------------------
\a Significant at the 1-percent level.
\b Significant at the 5-percent level
\c is the standard deviation of the error term.
The coefficient on the gender variable was positive and significant,
indicating that male respondents held a significantly higher
percentage of risky assets than female respondents. The coefficients
on the education and natural log of net worth variables were also
positive and significant. These results indicate that as
respondents' levels of education and net worth increase, the ratio of
risky assets to total assets that they hold increases as well. The
coefficient on the race variable was negative and significant,
indicating that nonwhite respondents held significantly lower
percentages of risky assets than white respondents. The other
independent variables were insignificant, indicating that there was
no significant correlation between these variables and the ratio of
risky assets to total assets held by the individuals.
OTHER SPECIFICATIONS
We constructed two other versions of the dependent variable, each of
which included other types of assets in the definition of risky
assets. Our second model included business equity, bonds and bond
funds in the risky category of assets, along with stocks, mutual
funds, and investment trusts. Our third model included IRAs, KEOGHs,
and other assets as well. Using the same set of independent
variables as in model one, we got very similar results from a tobit
estimation of each of these new specifications. In both cases, the
coefficient on the gender variable was positive, significant, and
actually of greater magnitude than our initial specification. The
other independent variables that were significantly correlated with
the dependent variable in model one were still significant in models
two and three. We report only the results of model one, however,
because we recognize that these broader definitions of risky assets
include some saving vehicles that cannot be easily classified as
either risky or safe. Assets such as IRAs and KEOGHs could fall into
either category, and without more information we cannot be sure that
we are labeling them accurately. By reporting only the results from
the estimation that uses our narrowest definition of risky
assets--that is, stocks, mutual funds, and investment trusts--we have
greater assurance that we are adequately measuring a true difference
in the level of risk that individuals are choosing as they allocate
their portfolios of assets.
ANNUITIES INFORMATION
We took the data on monthly annuity benefits for men and women from a
recent edition of Best's Policy Reports that provided data from 111
insurance companies that offer single premium immediate annuities.
The report lists the monthly benefit generated by a $100,000 single
premium, for men and women, under both qualified (or tax-deferred)
and nonqualified plans. The benefits are also differentiated by the
age of the annuitant, ranging in 5-year increments from 55 to 80 for
nonqualified plans and from 55 to 70 for qualified plans. Both a
lifetime-only option and a joint and full survivor option are
reported.
We report the annuity information for nonqualified plans only, since
they constitute two-thirds of all immediate annuities purchased. We
calculated the average monthly benefit across all 111 firms,
separately for men and women, and for each age. We also calculated
the range, within each age and gender category, between the largest
and smallest monthly benefit provided.
--------------------
\21 In the case of persons who are separated, divorced, or widowed,
we do not know which spouse made the initial investment decision.
However, since this group's investment pattern is different from that
of married couples, we are attributing the decisionmaking to the
individuals.
ELEMENTS OF SOCIAL SECURITY REFORM
PROPOSALS THAT AFFECT WOMEN
========================================================== Appendix II
Several different reform plans have been proposed to address Social
Security's long-term financing problem. Three plans put forth by
members of the 1994-96 Advisory Council on Social Security have
received the most attention, but other plans by members of the
Congress, research organizations, and advocacy groups have also been
proposed.
The three Advisory Council proposals are the Maintain Benefits plan,
the Individual Accounts plan, and the Personal Security Accounts
plan. At least two other plans have been proposed in legislation in
the Congress, including S. 321 (105th Congress) and S. 2176 (104th
Congress), and two more plans that have received serious attention
were proposed by the Committee for Economic Development, a research
organization, and the National Taxpayers Union Foundation, an
advocacy group. All seven plans are compared to current Social
Security law in table II.1.
Table II.1
Features of Social Security Under
Current Law and Reform Proposals
Reform proposals of 1994-96 Advisory Council on
Social Security
----------------------------------------------------
Personal
Type of Maintain Individual Security Committee for Economic Kerry-Simpson National Taxpayers
beneficiary\a Social Security Benefits Accounts Accounts Development Gregg bill\b bill\b Union Foundation
----------------- ---------------- ---------------- ---------------- ---------------- ----------------------------- ------------------ ------------------ ------------------
Retired worker --Benefit Extends --Extends --Creates two- --Creates two-tier system --Adds to the --Adds to the --Converts current
computation is computation computation tier system with with basic benefit based on current system by current system by system to a system
based on 35 period from 35 period from 35 a tier I flat years of taxable earnings and establishing a establishing a of Personal Thrift
years of highest years to 38 years to 38 benefit based on a personal retirement account mandatory 1% mandatory 2% Accounts (PTA),
taxable years of taxable years of taxable years of taxable (PRA) based on defined payroll deduction payroll deduction. based on payroll
earnings earnings earnings earnings and a contribution pension, Personal PIP to be used in contribution of 5%
--Progressive --Changes tier II personal financed by an additional Investment Plan a similar fashion (designed to
formula leads to benefit formula security account mandatory 3% contribution (PIP) to be used to the Thrift replace other
redistribution by lowering based on defined --Gradually lowers in a similar Savings Plan benefits of Old
--Benefits conversion contribution replacement rate for two fashion to the --Reduces factors Age and Survivors
reduced factors pension higher-income brackets Thrift Savings used for Insurance (OASI)
actuarially if --Accelerates --Accelerates --Favors annuitization of PRA Plan calculation of --PTAs can be
taken between 62 increase of NRA increase of NRA at retirement --Reduces factors PIA, based on age passed down after
and normal and indexes to and indexes to --NRA increases to 70, used for of worker death of worker or
retirement age longevity longevity beginning in 2000, by 2 calculation of owner of PTA
(NRA); increased --Creates --Increases months per year and indexed PIA, based on age --Mandatory
if taken after individual early retirement to life expectancy of the worker (minimum)
NRA account based on age to 65 years thereafter --NRA gradually annuitization at
--NRA to defined --Early retirement age (ERA) increases to 70 retirement (joint
increase to 67 contribution remains at 62 but with (and beyond) in and survivor
years for pension additional actuarial 2029 for both annuity if
persons born reduction workers and widows applicable)
after 1959 --Taxes all benefits in older than 62 --Fund balances in
excess of contributions beginning in 2000 excess of minimum
--Increases years of taxable --ERA gradually annuity purchase
earnings in primary insurance increases to 65 are unrestricted
amount (PIA) calculation from (and beyond) in
39 to 40 years 2017 for both
workers and widows
older than 62
beginning in 2000
Spouse --Benefit is 50% Same as current Benefits are 50% of full tier Reduces benefits from 50% to Unless otherwise Unless otherwise PTA is transferred
of the retired law lowered from 50% I benefit 33% of retired worker's decided, transfers decided, transfers to spouse at death
worker's to 33% of benefit for nonworking PIP balance to PIP balance to of owner
benefit retired worker's spouses spouse at death spouse at death
--Benefit is benefit
actuarially
reduced if taken
between 62 and
NRA
Survivor --Benefit is Same as current --Higher of own 75% of benefit 100% of deceased worker Balance of PIP is Balance of PIP is Retains all OASI
equal to amount law basic benefit or payable to benefit or own benefit, transferrable at transferrable at child benefits
deceased spouse deceased couple plus whichever is larger death of retired death of retired
would be spouse's basic eligibility to worker (if agreed worker (if agreed
receiving but benefit or 75% inherit balance to in writing; to in writing;
not less than of couple's of deceased otherwise spouse otherwise, spouse
82-1/2% of combined spouse's receives it) receives it)
deceased benefit personal
spouse's benefit --Joint and security
--Benefit is survivor annuity account
actuarially with individual
reduced if taken account balance
between 62 and
NRA
Dually entitled Receives own Same as current --Own individual Tier II own No mention Spouse receives Spouse receives PTA is transferred
beneficiary\c retired worker law account benefit accumulations PIP balance at PIP balance at at death of owner
benefit plus --Higher of own plus higher of death of retired death of retired
difference (if basic benefit or own tier I worker worker
positive) 33% of spouse's benefit or 50%
between spouse benefit of full tier I
or survivor benefit
benefit and his
or her retired
worker benefit
Divorced and --Must have been Same as current No mention No mention No mention If there is no If there is no In the event of a
surviving married for at law current spouse, spouse, then divorce, divides
divorced spouse least 10 years then benefits benefits devolve evenly all PTA
and currently be devolve to the to the assets
unmarried (for individual's last individual's last attributable to
divorced spouse surviving divorced surviving divorced wages earned
only) spouse but not if spouse but not if during the
--Must be at that former spouse that former spouse marriage
least 62 years is currently is currently
old for divorced married married
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 --Have eligible Same as current Same as for Same as for No mention No mention No mention Retains all OASI
and widowed child in care law spouse or spouse or nonaged survivor
mother or father --Younger than survivor plus survivor plus benefits
plus child 65 child's benefit child's benefit
--50% of retired (same as current (same as current
worker's benefit law) law)
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 Both Gregg (S. 321, 105th Congress) and Kerrey-Simpson (S. 2176,
104th Congress) contain provisions that allow them to operate in a
two-tier system. The first tier pays traditional Social Security
benefits that are lowered because of the reduction in the payroll
tax. The second tier consists of the PIP account balances that are a
percentage deducted from payroll.
\c Entitled to benefits as both retired worker and spouse or survivor
of retired worker.
(See figure in printed edition.)Appendix III
COMMENTS FROM SSA
========================================================== Appendix II
(See figure in printed edition.)
*** End of document. ***