Social Security Reform: Implications for Women (Testimony, 02/03/99,
GAO/T-HEHS-99-52).

Pursuant to a congressional request, GAO reviewed: (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.

GAO noted that: (1) women have benefited significantly from the social
security program; (2) many women who work are advantaged by the
progressive benefit formula that provides larger relative benefits to
those with lower lifetime earnings; (3) women who did not work or had
low lifetime earnings and who were married benefit from the program's
spousal and survivor benefit provisions; (4) however, women typically
receive lower monthly benefits than men because benefits are based on
earnings and the number of years worked; (5) 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; (6) other types of reform approaches can have positive or negative
effects on women depending on how the reforms are designed; (7)
restructuring social security to include individual accounts also will
likely have different effects on men and women; (8) because women earn
less than men, contributions of a fixed percentage of earnings would put
less into women's individual retirement accounts; (9) 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; (10) in addition, how such accounts are
structured will be extremely important to women; (11) 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; and (12) how
benefits might be distributed to divorcees and how accounts are
transferred to survivors could affect the retirement income of some
elderly women.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-HEHS-99-52
     TITLE:  Social Security Reform: Implications for Women
      DATE:  02/03/99
   SUBJECT:  Social security benefits
             Employee survivors benefits
             Federal social security programs
             Investment planning
             Retirement benefits
             Women
             Widowed persons
IDENTIFIER:  Federal Thrift Savings Plan
             Social Security Program
             
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Cover
================================================================ COVER


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 REFORM -
IMPLICATIONS FOR WOMEN

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

GAO/T-HEHS-99-52

GAO/HEHS-99-52T


(207056)


Abbreviations
=============================================================== ABBREV

  SSA - Social Security Administration

SOCIAL SECURITY REFORM: 
IMPLICATIONS FOR WOMEN
============================================================ Chapter 0

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
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. 


--------------------
\1 Social Security Reform:  Implications for Women's Retirement
Income (GAO/HEHS-98-42, Dec.  31, 1997). 


   HOW WOMEN CURRENTLY FARE UNDER
   SOCIAL SECURITY
---------------------------------------------------------- Chapter 0:1

Social Security has provided significant income protection for the
nation's women.  While women, on average, have lower earnings than
men, the program has several features that are advantageous to women. 
First, 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 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. 


--------------------
\2 In addition, the program also provides benefits for the children
of retired and deceased workers and for disabled workers and their
dependents. 

\3 Covered earnings are earnings subject to the Social Security
payroll tax, up to $72,600 for 1999. 

\4 These data include only earnings from 1951 to the year the worker
reached age 61. 


   HOW WOMEN MIGHT BE AFFECTED BY
   VARIOUS REFORM PROPOSALS WITHIN
   THE EXISTING PROGRAM STRUCTURE
---------------------------------------------------------- Chapter 0:2

The changes contained in various Social Security reform proposals
would likely have a disproportionate effect on women.  Many reform
proposals include provisions that would reduce current benefit
levels, for example, reductions in the cost-of-living adjustment and
increases in the normal or early retirement ages.  Reducing all
benefits proportionately would hit hardest those who have little
retirement income other than Social 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. 

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. 


--------------------
\5 These percentages are based on a sample of new awards in 1993. 

\6 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. 


   HOW WOMEN MIGHT FARE UNDER A
   SYSTEM RESTRUCTURED TO INCLUDE
   INDIVIDUAL ACCOUNTS
---------------------------------------------------------- Chapter 0:3

Many reform proposals would fundamentally restructure Social Security
by creating retirement accounts that would be owned and managed by
individuals.  While such accounts can increase benefits for retirees,
women 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 having shorter work histories and lower
earning levels, which suggests they generally will contribute less to
these accounts.  The difference is also partly the result of
differences in investment behavior. 


      WOMEN INVEST MORE
      CONSERVATIVELY THAN MEN
-------------------------------------------------------- Chapter 0:3.1

Economists have found evidence suggesting that women generally are
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 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. 


--------------------
\7 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. 

\8 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). 


      ANNUITIZATION CHOICES WILL
      AFFECT RETIREE'S BENEFITS
-------------------------------------------------------- Chapter 0:3.2

How individual account accumulations are paid out will also make a
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 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 lost. 

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 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. 


--------------------
\9 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. 

\10 That is, same-aged men and women would receive identical annuity
benefits for the same price. 

\11 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. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 0:4

While the Social Security system has benefited women significantly
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. 


-------------------------------------------------------- Chapter 0:4.1

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


*** End of document. ***