June 3, 2001

A Retirement Account of One’s Own

By: Laura Dykes

In April, government actuaries reported that Social Security is unsustainable in its current form. Unless key reforms such as privatization are undertaken, the program will face a fiscal crisis as the baby boom generation retires. And because Social Security is not gender neutral, women will suffer the most.

Statistically, women benefit less from Social Security than men. Women live longer than men and require more retirement income. On average, non-married elderly women depend on Social Security for 72 percent of their retirement income. And because women tend to work fewer years, Social Security’s formula for calculating benefits — based on a 35-year career — is also unfavorable to women. The average woman works only 27 years.

Differences in employment patterns, such as fewer years working, lower wages, and more job changes, yield lower Social Security benefits for women. And poverty rates for elderly women are twice as high as they are for elderly men.

Social Security’s dual entitlement rule punishes working wives and rewards married, stay-at-home women. Under this rule, a woman qualifies for benefits as a worker or as a spouse, but not as both. Therefore, a couple in which both spouses work may get fewer benefits than a couple with identical lifetime earnings in which only one spouse works.

The dual entitlement rule also harms widows. According to a Cato Institute Briefing, the non-working woman whose spouse earns $34,200 in annual pay will receive $1,082 as a widow, while the working wife who brought home half that paycheck gets a widow’s benefit of only $674.

The Social Security Administration reports that the dual entitlement rule reduces the benefits of 24 percent of married and widowed women. That number is projected to increase to 39 percent by 2040 as increasing numbers of women earn higher wages and work more hours. Personal retirement accounts would eliminate this kind of discrimination against working wives and widows.

A married woman is shortchanged by Social Security’s structure again at her husband’s death. Since a woman cannot own even part of her husband’s account, she loses her spouses benefits when he dies. Alternatively, Social Security privatization would guarantee spousal and survivor benefits by establishing individually-owned personal retirement accounts for women. If a women legally owned her account, and at least part of her husband’s, she would not lose benefits in the event of divorce or death.

Currently, workers pay 12.4 percent of their wages for Social Security. But within a decade, when the baby boom generation begins to retire, Social Security will face severe pressure. Beginning in 2016, tax income will fall
short of outlays. The Social Security Board of Trustees estimates that workers will have to pay 20 percent of their wages in order to keep the
system solvent. By 2032, Social Security will be able to fund only 72 percent of benefits. The average woman’s monthly benefit would plummet from
$621 to $447, throwing even more women into poverty.

Today, retiring workers collect a paltry two percent return from Social Security. But since Social Security is a pay-as-you-go system (retirement benefits for today’s retirees are paid for out of payroll taxes imposed on today’s workers), an 18-year-old woman will get a 1.64-percent return from Social Security. Bonds, in contrast, would have given her a three or four percent return. A diversified portfolio of stock and bond investments would have produced a 4.82 percent return. As Social Security currently stands, however, younger workers can look forward to a negative return on their money.

According to the Cato Project on Social Security Privatization, no woman would be worse off in retirement if she were allowed to place her Social Security taxes in personal accounts that could be invested. Indeed, virtually all women would be better off.

For example, Abby, a 25-year-old woman who earns approximately $25,000 a year in the District of Columbia, can expect $911 a month from Social Security, according to the Social Security Administration’s Benefit Calculator. But Cato’s calculator estimates Abby could expect $7,061 a month if she could have invested her tax payments in a stock fund — $6,150 more than what she would receive from Social Security.

The study also revealed that women could contribute as little as seven percent to personal accounts to reap more generous benefits. The remaining 5.4 percent of the 12.4 percent payroll tax could be used for other purposes, such as to finance benefits for retirees without personal accounts — or to finance transition costs, provide disability benefits, or protect against market risk. Personal accounts would provide married, divorced, and widowed women with at least $200,000 more in retirement benefits than Social Security.

Critics of Social Security privatization claim investing is risky. However, individuals pay into Social Security for 35 years, on average. Researchers at Harvard University estimate the return on private capital averaged 9.3 percent for the 34-year period from 1960 to 1994 and estimate it to be currently 6.2 percent.

According to Chicago’s Ibbotson Associates, stocks climbed 7.8 percent a year during the 30-year stretch through August 1959, turning $10,000 into $95,000. And that was the worst 30-year period for stocks over the past 75 years.

Women should be free to either stay in or opt out of the current system. Then they could choose to place 10 percent of their income in personal accounts, like women in Argentina, Australia, Bolivia, Chile, Denmark, Great Britain, Hong Kong, Hungary, Mexico, Peru, Poland, and Singapore. All of these countries feature personal retirement accounts as part of their social security systems.

These countries have been able to reform their retirement systems successfully without raising taxes or reducing benefits. Workers in Chile
have been enjoying 12.5 percent returns. Lawmakers would do well to learn from these examples of reform from around the world.

As the lifestyles of women change, so do their retirement needs. Women should not be made to depend on Social Security for their retirement
income. Rather, they should be allowed to rely on their own personal retirement accounts. Women not only deserve better, they have earned better.