Why Women Need Social Security Reform

The following remarks were presented by IWF policy director Carrie Lukas at the College Convention 2004, held January 9 in Manchester, NH.

Thank you all for being here today. It is a great sign that so many students have come out here today to take part in the democratic process, and to learn something about the issues that will truly shape our country in the years to come. I am particularly pleased that with all that is going on in this arena, you have chosen to come and focus for a bit on Social Security. Social Security is an issue that doesn’t just affect the elderly, it effects all of us, today.

I am going to focus my remarks on how women are being effected by Social Security. If there is one point that all sides in the Social Security debate agree it is that Social Security is critical for women.

• Women live longer than do men, and have lower incomes during retirement.
  
  
• Women take more time out of the workforce than do men, and disproportionately work in jobs that do not offer retirement savings plans.
  
  
• Women depend on Social Security for a larger portion of their retirement income than do men. In fact, 27 percent of women over age 65 depend on Social Security for 90 percent of their retirement income.

The actions policymakers take to address Social Security financing problems and to improve its services will have a significant impact on the living standards of American women.

There are three primary problems with Social Security that affect women. I am going to provide an overview of those problems, and then discuss how they can be addressed.

The first problem is the one that we all know. The previous speaker already thoroughly described Social Security’s looming financial crisis, and its root causes: the growing senior population, the relatively slow birth rate, and the all important retirement of the baby boom generation. In brief:

• Seniors are a growing portion of the population: In 1950, just 8.5% of the population was over age 65. Today, seniors account for 12.4%; by 2050, they will be nearly 21%.
  
  
• This means that each young worker must shoulder a greater cost of providing for Social Security beneficiaries. In 1960, there were 5 workers paying taxes to support each retiree. Today, there are just over 3. By 2050, when today’s teenagers are getting ready to retire, there will be just 2 workers supporting each retiree.
  
  
• As a result, the amount of money that each worker will have to pay to maintain Social Security benefits is going to skyrocket. Already, most Americans already pay more in Social Security taxes than they do in income taxes. Social Security claims 12.4% of each paycheck. By 2040, if nothing is Social Security is not reformed, workers will have to pay 18% of their paychecks or nearly 1 out of every 5 dollars they earn just to support Social Security.

These financial problems are particularly important to women, since women dependent more on Social Security during retirement and make less money during their working lives. Any benefit cuts or payroll tax increases that are implemented to prop up the current system will be hard on women.

The second problem with Social Security is that, even if the existing system didn’t have the financial problems, it would still be providing a bad deal for its participants. For each generation that passes through the system, the benefits they receive are becoming smaller in relation to the amount they pay in.

This makes Social Security a bad deal for younger workers. The rate of return for a single woman born in 1980 is 1.4%. For a single man it is less than 1%.

And it will only get worse if policymakers use benefit cuts or tax increases to deal with Social Security’s financial crunch.

Some times critics of Social Security reform will try to discount this fact, and say that rates of return aren’t important. But for many Americans, this is their only chance to save. This is particularly true for low-income Americans, those who are barely making ends meet from month to month. They are paying more than 1 out of every 10 dollars they earn to the government for Social Security. They are also paying for housing. They are trying to put away money to help their kids go to college.

Sure, ideally they would also set something aside in another retirement vehicle that enables them to accrue real savings so they won’t depend solely on Social Security. But that isn’t always possible. The money they are paying into Social Security is often their one chance to save for retirement. It seems a terrible disservice that we have created a system that squanders that chance.
This is particularly true for women who often elect to work part-time or in jobs that don’t offer retirement plans. It is critical for women that the money that they are putting away for retirement through Social Security is put to good use.

The final problem with Social Security is one that I think should be particularly important to the young women here today. That problem is a problem of fairness in how it treats one woman compared to the next.

Under the existing system, women either receive benefits based on their own work history or as a result of her husband’s work history. For example, a woman who never joins the formal workforce and pays no Social Security taxes will receive benefits of 50 percent of her husband’s monthly benefit at retirement. As a result, a family in which the husband works and the woman stays home will receive benefits 50 percent higher than they would if the man had been single, even though they paid the same amount into the system.

A married woman who works will receive the higher of either half of her husband’s benefits or a payment based on her own work history. As a result, many married women who join the workforce receive no additional benefit for the taxes they pay into the system.

This is not only unfair to working women who receive no additional compensation for their work but it also distorts the decision of women considering entering the workforce. A married woman already faces high marginal tax rates since her income is going to be combined with her husbands. If she expects to get no additional retirement benefits from the payroll taxes she faces, they are another completely loss in terms of income. Plans that increase Social Security’s payroll taxes exacerbate this problem and may discourage women from entering the workforce. This makes them more vulnerable to financial ruin if they are widowed or divorced.

I think that an important principle in public policy is that individual should freely make decisions about their lives without government interference. For the young women in the room, one of the most important decisions you will make is how to balance the tradeoffs between pursuing a career and raising children. Too often the debate over policy seems to assume that government ought to be encouraging women one way or the other — to either stay at home as full-time moms, or to hit the pavement and work full-time. Unfortunately, Social Security is pretty heavy-handed in encouraging married women to stay home. I believe transforming Social Security to a neutral system, so that it treats all men and all women equally, should be an important policy goal.

I have talked a lot about Social Security’s short-comings. That’s the easy part. So how can we fix it so that the system is sustainable, provides a better deal for tomorrow’s workers, and treats people more fairly?

The most promising set of reforms is to creating a system of personal retirement accounts within the Social Security system. This reform can begin to address each of the problems I have outlined.

There are numerous specific proposals for how to integrate a system of personal accounts into Social Security. However, they share similar principles. Workers would use a portion of the payroll taxes they currently pay to Social Security to fund an account which they would own. Much like participants in a 401k plan, workers would be able to choose from several investment options such as government bonds or broad mutual funds. These contributions would accumulate throughout the workers life and would be used to finance his or her future retirement income. Retirees would still receive part of their retirement income from the existing, defined benefit system, but would also receive income from an annuity that would be purchased using the money built up in their personal retirement account.

By replacing part of the pay-as-you-go system with a pre-funded system of accounts, policymakers would address Social Security’s long-term financing problems and ease the burden on younger workers.

A system of personal accounts would also help address Social Security’s second problem, which is providing a valuable program for younger workers. Workers would be able to invest a portion of their payroll taxes in bonds and stocks, both of which typically deliver a higher rate of return than our Social Security system. Even if workers were allowed to save and invest just a fraction of what they earn throughout their lives, they would accrue a considerable nest egg by the time they reach retirement. For example, a worker earning $30,000 who invested 4 percentage points of payroll taxes — less than one third of the total they are putting into Social Security — in a bond portfolio with a rate of return of 4% would accumulate nearly $150,000 after working for 40 years. A woman who worked just five years at the beginning of her life before having kids would accumulate $30,000 just because of those initial contributions and the interest it earns while she stays home.  Importantly, this account would be that woman’s property so if she died before age 65, she would be able to pass it on to her loved ones.

This would also make the system more equitable in its treatment of women. Those women who choose to work would be putting more away for retirement. Those who choose to stay at home would still be earning interest on the money they previously invested, but would know that if and when they choose to return to the workforce, they wouldn’t just to throw their payroll taxes away.

Of course, there are challenges that must be addressed when making the transition from the current pay-as-you-go system to a system of personal retirement accounts. Allowing workers to use a portion of the money they currently pay into the system to fund their future retirement means that the government will have less to spend on benefits today. However, there are several ways to pay these transition costs, and in the long run, the government financial picture is significantly improved by making a timely investment in putting Social Security on solid financial footing.

There are trade offs to all the proposals to fix Social Security. Importantly, there are also trade offs for doing — primarily that Social Security’s problems will simply not go away and will continue to get worse as politicians punt the issue into the future.

As you consider supporting different candidates for president, be sure to ask them how they would address Social Security’s problems. Don’t just accept their critiques of opponents’ plans.

I think that this discussion is an auspicious beginning to this election year. I thank you for your time and look forward to your questions.