Reform Needed to Address Lower Retirement Income for Women

October 12, 2007 ( - The Government Accountability Office (GAO) has issued a report suggesting changes to social security and retirement benefit laws could help narrow the disparities between retirement income for women and men.

Although it made no recommendations, the GAO provided results of simulations of changes in the law showing the effects on benefits for men and women of different ages, income levels, and marital status. The GAO said, “With such knowledge, policy makers have the potential to mitigate both existing disparities in retirement income as well as the differential effects of reforms.”

The simulations of some proposed changes to the Social Security system and the employer-sponsored pension system resulted in different effects on women and men, and among different subgroups of women, because of differences in lifetime work histories. On one hand, the report said, the model results showed that modifications that compensate for low earnings or time spent out of the workforce for caregiving tend to increase benefits for beneficiaries overall and particularly those in lower income quintiles.

On the other hand, according to the report, the changes that focus on shifts in family structure, such as increases in two-earner couples and increased incidence of divorce, tend to increase the benefits of groups targeted by the change, but produce mixed results for others.

Additionally, some pension rule changes that have been proposed or passed into law in the past several years that take into account changes in the labor force and the changing norms of employer-provided retirement plans are gender-neutral, but may provide important new opportunities for some women to increase their retirement income, the report said.

The Simulations

The GAO simulated the effect of a dependent care allowance that would credit a worker’s earnings record with one-half of average wages in years in which there was a child under five years of age in the household and the worker’s earnings were less than one half of average wages. It evaluated the impact on the Social Security benefits of two simulated populations – one cohort born in 1950 and another born in 1985.

The change affected the largest number of beneficiaries, both men and women, of any of the simulations, the GAO reported.

The simulation showed this dependent care credit resulted in positive median benefit changes for both women and men, though it provided a larger increase in median benefits for women (3.24% and 2.63% for the female cohorts, respectively, compared to 2.6% and 2.06% for the male cohorts).

Women in the lowest earnings quintile had the highest proportionate gain in their Social Security benefits (7.96% and 6.88%, respectively), compared to 2.8% and 2.12% for middle quintile, and .92% and .72% for highest quintile. In both cohorts, never-married women had the largest median change in benefits (7.95% and 6.69%).

Excluding care years from earning averages is an approach that would reduce the standard 35-year basis for determining a worker's average indexed monthly earnings by subtracting the number of years spent providing care. It generally also specifies a limit for the number of years that can be dropped from the calculation of average earnings.

Because the design specifies years of zero earnings, this approach may not target financially needy populations who lack sufficient resources to take full years off from work, the GAO said. High-income caregivers may be more likely to benefit from such an approach if economic necessity drives low-income caregivers back to the workforce, while those in high-income families are able to stay out of the workforce longer.

To simulate the effect of an increased minimum benefit, the GAO modeled a change to set a minimum benefit of 120% of the federal poverty level for 30-year workers, linearly phased to zero for workers with 20 years or less of covered employment.

Slightly fewer men than women in the simulation were affected by the change and those who were had a slightly lower median benefit change than women affected by the change (8.47% and 6.20% for each male cohort, respectively, vs. 9.89% and 6.70% for each female cohort).

In both cohorts, a larger share of women in the lower two income quintiles had benefit changes resulting from this modification than women in the upper three income quintiles. Never-married and divorced women had much larger percent changes in median benefits (22.8% and 19.01%, respectively, and 17.13% and 14.5%).

A minimum benefit following parameters such as the GAO simulated may increase benefits for both part-time and full-time workers. Because Social Security only tracks annual earnings rather than wages or hours worked, a higher-earning, part-time worker could receive the same benefit as a full-year, low-income worker; meaning enhanced benefits may be provided to individuals who work part time by choice.

GAO modeled a survivor benefit that would provide a surviving spouse with the higher of 75% of the couple's previous combined benefit level, capped at the average benefit level for all new retirees, or the current law survivor benefit. This simulation resulted in increased benefits for both men and women. While about three times the number of women as men were affected, the magnitude of the benefit change was larger for men who were affected by the program modification - nearly 29% in both cohorts. This is attributable to the increased survivor benefit modification compared to current law. Current law allows survivors the greater of their own benefit or their spouse's benefit. As most men receive a larger benefit than their spouses, a survivor benefit of the larger of 75% of the couple's combined benefit (capped at the average benefit level for all new retirees) or the husband's benefit would provide a higher benefit level than current law to lower-earning men who outlive their wives.

GAO simulated a modification that would reduce the duration of marriage requirement for receiving divorced spouse benefits from 10 to 7 years. In the 1950 and 1985 cohorts, among women who had a benefit change due to the reduced marriage requirement, the median percentage change in benefits was about 65% and 45% respectively, the largest median change in benefits for women among all reforms modeled.

The changes in this simulation also resulted in a handful of newly eligible beneficiaries. Among the seven simulations, this was the only one that resulted in new beneficiaries.

The GAO pointed out each of the Social Security changes it modeled would have small, but negative, effects on program solvency.

As for changes to retirement plan law, the GAO projected the impact of a reduced vesting schedule on retirement benefits. For DB plans it specified 2- year cliff vesting, and for DC plans it specified 2-year cliff, and 3-year graduated vesting schedules. For the 1985 cohort, the median percentage change in benefit levels for women who were affected by the change was an increase of 6.29%. Similarly, men's median percentage change in benefits for those affected was 5.74%.

While the number of women affected by this change was fairly evenly distributed across the top four income quintiles with fewer in the lowest, the median percentage change in benefits is much larger for the women in the lowest quintile than in higher quintiles; for those in the lowest quintile, the median percentage change in benefit levels was more than four times the change for women in the highest quintile and nearly twice that of women in the second lowest income quintile.

While the number of married women affected was larger than the number affected in other marital classifications, the median percentage change in benefits for never married and divorced women was almost twice the median percentage change in benefits for married and widowed women.

GAO also modeled what the impact could be on retirement benefit levels if 100% of accrued retirement balances were reinvested into qualified accounts after every job change until retirement. For the 1985 cohort, the median percentage change in benefits for those affected was quite similar for men and women, 7.3% and 7.63%, respectively. This assumes that those affected would not make any changes in their savings or spending behavior to offset the requirement.

Among women who were affected by the change, those who were never married (15.04%) or who were divorced (12.09%) had the largest percentage median increases in benefits. Additionally, while the number of women affected by this change was fairly evenly distributed across the top four income quintiles, those in the lowest income quintile had substantially larger median percentage changes in benefits than those in the highest quintile (16.94% vs. 3.62%).

Generally, women have less retirement income than men, largely because of women's lower labor force attachment and lower earnings, on average, the GAO report said. Fewer women than men have income from most major retirement sources, and those women who do receive income from these sources receive less than men. Women's median Social Security benefit is approximately 70 percent of the median benefit that men receive. Meanwhile, fewer women than men have pension incomes, and the median value of their pensions is about half that of men's.

While only a small proportion of men and women aged 65 and over are engaged in the paid labor force, among those who are, women earn just over half of what men earn. While there is less distinction between the income of men and women from assets such as interest, dividends, rents, and royalties, women earn somewhat less than men from these sources as well.

Older women are more often poor than men. Among those 65 and over, 12% of women are in poverty, compared to 7% of men. Although women's work outside the home has increased substantially in the last century - with the labor force participation rate of married women aged 16 and over increasing from approximately 32% in 1960 to 61% in 2006 - they spend fewer years in the labor force than men and they more often work part-time. Additionally, they tend to earn less than men during their working years, earning only 77% of what men earned for full-time, year-round work in 2005.

Additionally, certain life events - including changes in marital status, labor force interruptions, and long-term care needs - can significantly reduce the amount of pension income and Social Security benefits for both men and women. However, because of women's lower earnings and labor force participation, these events may increase the probability women will enter retirement with fewer financial resources than men.

Divorce often results in economic loss for both men and women, but women tend to experience more economic loss than men, the GAO pointed out.

Women's role as primary family caregiver for children and elderly relatives can also reduce their career earnings. For example, one study documented that almost half of women who worked during pregnancy with their first child took unpaid leave and one-quarter quit their jobs.

Because women tend to live longer than men, they are more likely than men to experience widowhood, and in part because of their longer average life spans, women are also more likely than men to become disabled and need long-term care, further increasing demand upon their retirement resources.

The GAO report is here .