By Bruce D. Schobel, Vice President and Actuary, New York Life Insurance Company
While differences in the treatment of men and women under the U.S. Social Security program are now virtually nonexistent, differences in the typical work patterns of men and women have significant effects on the benefits that they receive. Some proposed changes in the Social Security program would exacerbate these differences. In any case, people need to know about the gaps in Social Security protection that can occur under certain circumstances.
Historical Treatment of Men and Women under Social Security
The Social Security program has not always been gender-neutral. At times, differences in the rules applying to men and women were quite obvious and significant. In nearly every case, women got more favorable treatment. For example, in 1956, women were granted the right to claim early-retirement benefits as early as age 62, while men had to wait until the normal retirement age of 65. (In 1961, men were also granted the right to claim early-retirement benefits at age 62.) Similarly, women were able to use, in general, three fewer years of earnings in the computation of their benefits than were men born in the same year, which results in somewhat higher benefits for women than for men with identical birth dates and earnings histories (because the average annual earnings always declines as more and more "high" years are included); this did not change until the mid-1970s.
A series of Federal court decisions and legislative changes, culminating in a massive clean-up of the Social Security Act in 1983, eliminated virtually all of the gender-based differences in the law. The only remaining difference of any significance is that women whose benefits were computed using the favorable shorter computation period that used to apply continue to receive the same benefits even today. (These women are at least 99 years old in 2011!) The benefits of otherwise identical men were not raised to what the benefits would have been if these beneficiaries had been able to use the more favorable computation procedure. Prospectively, however, identically situated men and women receive identical benefits provided that they have identical birth dates and earnings histories.
Gender-Related Differences in Earnings Patterns and Their Effects
Of course, men and women seldom have identical earnings histories. Men have historically spent more time in the paid labor force, and while these differences have certainly shrunk in the past 35 or so years (as huge numbers of married women entered and remained in paid employment), they have not disappeared entirely. Most women still leave paid employment for at least a short time after having children, and many leave paid employment for a substantial period of years. These "gaps" in the earnings histories of women usually result in lower Social Security benefits than they would have received if they had worked steadily, as most men do.
A brief description of the computation of retired-worker benefits under Social Security will illustrate this effect. The benefit-computation procedure has the following steps:
- Social Security-covered earnings for each year from 1951 through age 60 are adjusted to reflect past changes in the national average wage; this process is called "indexing." (Earnings at age 60 and older are not adjusted in any way.)
- The year-by-year indexed earnings are put in descending order, highest to lowest.
- The highest 35 years of earnings are identified and totaled (fewer years of earnings are used for workers born before 1929 and those who have received disability benefits).
- The total indexed earnings is divided by 420 (if 35 years were used) to obtain the Average Indexed Monthly Earnings (AIME).
- The AIME is put through a formula to obtain the Primary Insurance Amount (PIA), which is used the determine all monthly benefits payable on that worker's earnings record. The PIA is also equal to the monthly retired-worker benefit payable to that worker at his or her normal retirement age (age 65 for workers born before 1938; higher for workers born in 1938 and later, up to age 67 under present law for workers born after 1959).
Step 3 is the critical step creating differences between the benefits of men and women. While the vast majority of men have 35 years of substantial earnings by the time they reach Social Security's earliest eligibility age of 62, only a minority of women today have such consistent earnings. When a worker has fewer than 35 years of earnings, Social Security law requires that zero years be included, which obviously reduces the monthly average. For example, a women with only 25 years of lifetime earnings has her retired-worker benefit computed using those 25 years (indexed) plus 10 zero years, but still the total is divided by 420 to determine the AIME. This problem affects relatively few men.
Even when women participate in paid employment, they still tend to earn less than men. The reasons for these differences are complicated, of course, and cannot be completely explained by scientific study. On average, however, they result in smaller Social Security benefits for women than for men.
With the tremendous increase over the last three decades in the labor-force participation rates of women, one might wonder whether these problems might not go away on their own someday. While anything is possible, that does not seem likely. Women's labor-force participation rates have risen dramatically since the 1950s, but they seem to have stabilized at around 70 percent for married women at the typical working ages (higher for single women), still substantially below the rates for men, which are over 90 percent at the typical working ages. The apparent ceiling in married women's labor-force participation rates is undoubtedly related to child-bearing and child-raising, the first of which is exclusively the domain of women and the second of which is generally dominated by women. The differences in earnings rates between men and women, which are difficult to explain currently, are even more difficult to predict, but as long as women are primarily responsible for child-care, some differential is likely to remain.
Social Security Benefits for Spouses and Widows
While Part 1 focused on retirement benefits payable to workers, millions of women receive Social Security benefits as the spouses and widows of men who worked in Social Security-covered employment. A brief review of the law may be helpful in understanding these situations.
The spouse of a living retired-worker beneficiary is eligible to receive, at normal retirement age, a monthly benefit equal to 50 percent of the retired worker's primary insurance amount (PIA). The non-working spouse can elect to receive this benefit as early as age 62, with an actuarial reduction (but only if the other spouse has already claimed his retired-worker benefit; a special rule applies in divorce situations).
In death cases where no young children are eligible for Social Security survivor benefits, the widow of a deceased insured worker can receive, at normal retirement age, a monthly benefit equal to 100 percent of the deceased worker's PIA. A reduced widow's benefit can be claimed as early as age 60 (or age 50 if the widow is disabled). The widow's benefit may also be reduced if the deceased worker had claimed retirement benefits before his normal retirement age and was receiving an actuarially reduced benefit at the time of death. Where young surviving children are present, the widow of a deceased insured worker can receive, at any age, 75 percent of the deceased worker's PIA as long as she is caring for the deceased worker's child and that child is either under age 16 or continuously disabled since before age 22. (The surviving child can also receive, until age 18, a monthly benefit equal to 75 percent of the deceased worker's PIA. These benefits can continue until the child reaches age 19 if a full-time primary or secondary school student, or to any age if the child has been continuously disabled since before age 22. The combined survivor benefits payable to the widow and surviving children are subject to a maximum family benefit that ranges from 150 percent to 188 percent of the deceased worker's PIA.)
Men are technically eligible to receive exactly the same benefits as women, but few men actually receive spouse's or widower's benefits because of Social Security's dual-entitlement rules. These rules prevent duplication of benefits when a person is eligible for more than one type of Social Security benefit. For example, the 65-year-old widow of a deceased insured worker may have worked long enough in Social Security-covered employment to be eligible for a retired-worker benefit based on her own earnings record. In that case, she would receive her retired-worker benefit, and her potential widow's benefit would be reduced dollar-for-dollar by the amount of her worker benefit. If the benefit based on her own work record exceeds her potential widow's benefit, then the widow's benefit would be reduced to zero.
A beneficiary always receives his or her own retired-worker benefit (assuming that he or she applies for it), and any spouse or widow(er) benefit is reduced accordingly, as described above. Because men are almost always eligible for substantial benefits based on their own earnings and usually had higher and more consistent earnings than their wives did, men seldom can receive any additional benefits based on their wives' earnings records. Therefore, the eligibility conditions for receiving spouse's and widow's benefits and the levels of those benefits tend to be of greater concern to women than to men.
One of the greatest concerns of women is Social Security's so-called "black-out period." That is the period of time that normally elapses in survivor cases between when the youngest child turns 16 and when the widow turns 60 (assuming that neither the widow nor any child is disabled). Social Security widow(er)'s benefits ordinarily end when the youngest child reaches age 16 and cannot begin again until the widow(er) reaches age 60. If, for example, a widow had her last child at age 35, then her survivor benefits would end at age 51 and could not begin again for almost 9 years: this is the black-out period. Except in cases involving disability, the only widows who avoid this problem are those who had their last child at age 44 or later, a fairly unusual situation.
Proposals to Change Social Security
Most Social Security analysts agree — and the government's own projections show — that the program will begin to have financial problems around the year 2015, when outgo is expected to permanently exceed tax income under present law. The financial problems will worsen as the huge baby-boom generation enters retirement in ever-increasing numbers, and the program is expected to exhaust its accumulated reserve funds around 2037. At that time, tax income will cover only about 75 percent of benefit outgo.
A large number of plans have been developed over the years to solve Social Security's anticipated financial crisis. While none of these is likely to be enacted into law any time soon, many of the provisions would have disproportionate effects on women. Two examples, which have appeared in several plans, deserve some scrutiny.
The first is increasing the computation period (that is, the number of years of earnings used to compute benefits) from 35 to some higher number, like 38 or 40. Proposals of this type would reduce Social Security benefits for all workers, because the average of the highest 38 years of earnings is always lower than the average of the highest 35 years (unless all years of earnings are equal, which is almost never true). Still, the greatest reductions would be to the benefits paid to women, because they are less likely than men to even have 38 or 40 years of earnings, in which case they would have to include zeroes in their averages. For women who can receive larger benefits as spouses or widows, the reductions in their worker's benefits may not be important, but the majority of women will not be able to receive larger spouse's benefits in the future, and widow's benefits are usually not payable until rather late in life.
The second proposal that would have a disproportionate effect on women is to reduce the spouse's benefit percentage from 50 percent of the other spouse's PIA to 33 percent. In situations where women receive larger benefits as workers, this reduction is irrelevant, but in other cases, the reduction can be dramatic. Because the vast majority of people receiving spouse's benefits are women, this proposal obviously affects them much more than men.
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