Plan Design Changes May Especially Benefit Women

May 22, 2014 ( – Witnesses for a hearing about women’s retirement security advocated for Social Security improvements, expanded retirement plan access, and plan design changes.

Those giving testimony for the Joint Committee on Taxation’s hearing noted that women generally have lower incomes than men, and due to caregiving responsibilities, women are more likely to step out of the work force for a time or work part-time. In addition, the decrease in the number of people getting married, and the likelihood married women will outlive their husbands, will affect the Social Security benefits of women (see “Addressing the Retirement Security Risks of Women”).

“The private retirement system which includes employer–sponsored plans needs to be extended so that those without access to a workplace plan will have the opportunity to save. These opportunities need to be extended to part-time and temporary workers,” M. Cindy Hounsell, JD, president of the Women’s Institute for a Secure Retirement, said. “Recognizing the difference in men’s and women’s work experience as well as their longevity indicates the need for financially innovative products, and increased financial education and planning to improve the financial security of older women and men.”

Hearing witnesses recommended automatic features in employer-sponsored plans, and automatic savings options for those without access to a plan, can especially help women who tend to have lower incomes since those with lower incomes are less likely to opt in to a savings plan.

Debra B. Whitman, executive vice president of Policy, Strategy and International Affairs at AARP, noted that the movement from a mostly defined benefit (DB) retirement plan landscape to mostly defined contribution (DC) plans has important implications for retirement security for all, but two consequences of the shift particularly for women, are the loss of automatic life annuities through employer-based plans and the loss of spousal consent for the type of distribution being made from these plans.

She said AARP believes more DC plan sponsors should offer fixed life annuities as a distribution option, adding, “Doing so will give women additional protection against outliving their retirement assets and old-age poverty.” (See “Guarantee It.”) In addition, she contended adding spousal consent requirements could increase the proportion of workers taking distributions in the form of annuities, further enhancing women’s retirement security.

Whitman explained that in the case of a married couple, defined benefit plans must pay benefits as a life annuity with survivor benefits for the spouse (i.e., joint and survivor annuity) unless the spouse consents to waive the survivor benefit.

Brigitte Madrian, Aetna Professor of Public Policy and Corporate Management at Harvard Kennedy School, agreed with these suggestions, and added that knowing how to draw down savings is key for women (see “Pre-Retirees Need Strategies for Withdrawing DC Assets”). “My biggest concern for women is what happens in retirement. Women have longer life expectancies than men, and married women tend to be several years younger than their husbands, so that the average married woman reaching retirement can expect to spend several years as a widow, and the average single women reaching retirement will spend all of her retirement years [single]. In the shift away from defined benefit and toward defined contribution retirement plans, the financial security of women in retirement will depend very much on how the wealth accumulated for retirement is managed,” she said.

Concerning Social Security, Whitman said because older women have fewer sources of other retirement income, they are more dependent on Social Security benefits. She cited research that shows Social Security is currently the principal source of family income for 53% of older women, and nearly the only source (90% or more) of family income for about one in four women, compared to about one in five older men. In addition, she noted, Social Security benefits replace a higher portion of preretirement earnings for low earners than high earners. “Because women are more likely to be lower lifetime earners than men—either because of low wages or limited work histories or both—Social Security benefit’s progressivity is a key component to keeping women out of poverty,” she said. “AARP believes that the current shortfall should be addressed sooner rather than later, so that the program’s fundamental structure and the protections it offers to almost all workers and their families can be protected.”

Whitman warned that reducing Social Security’s cost-of-living adjustment, on which older women are so dependent because of their longer life expectancy, should not be the solution to addressing the administration’s reported shortfall as it will cause women to fall further behind, and push many into poverty.

Hounsell also recommended changes to Social Security to help caregivers, including a specified earnings credit that would provide caregivers a set amount of earnings for a set number of years in which there was a child or parent in care and the caregiver’s actual earning was zero or greatly reduced from previous years, or a modification to the traditional Social Security benefit formula for workers who take time out of the work force by dropping out a set number of caring years from the highest 35 years required to determine the benefit.

Links to the archived webcast of the hearing and witness testimony are here.