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National Women's Law Center11 Dupont Circle, Suite 800Washington, DC 20036 (202) 588-5180 FAX (202) 588-5185 December 3, 1998 INDIVIDUAL ACCOUNT PROPOSALS THREATEN SOCIAL SECURITY'S ESSENTIAL PROTECTIONS FOR WOMEN AND THEIR FAMILIESFor over 60 years, Social Security has increased the economic security of all Americans -- but its guaranteed benefits and family protections are especially important to women. Women represent 60% of elderly Social Security recipients, and women depend more on Social Security benefits than do men. Social Security provides more than half of the income of elderly women living alone, and is the only source of income for 25% of such women. Elderly women still have a poverty rate that is nearly twice as high as that of elderly men (13.1% versus 7%). But without Social Security, more than half of all elderly women would be poor. The Social Security system is not in crisis now. It can pay benefits at current levels for more than 30 years. However, by 2032 the surplus in the Trust Fund is expected to be gone, and payroll taxes will be insufficient to maintain benefits. To ensure adequate benefits for future generations of women, Social Security needs to be strengthened by reforms that close the financing gap and improve the economic security of women and their families. Unfortunately, the debate over ways to reform Social Security seems to be focusing on proposals to replace Social Security, in whole or part, with individual accounts which pose serious risks for women. For that reason, this brief statement focuses on the problems inherent in individual accounts.
Social Security is a social insurance program designed to provide meaningful retirement benefits to all workers and their families. Social Security's benefit formula is progressive: those who have worked for low wages throughout their lifetime receive retirement benefits that are a larger percentage of their lifetime earnings. And Social Security guarantees benefits to spouses, divorced spouses, and surviving spouses: a vital protection for women who spend time out of the labor force to care for children and other family members. Although women are working more and earning more than in the past, their lower earnings relative to men's will persist. The wage gap has narrowed, but not disappeared. And women are still more likely than men to spend time out of the labor force or working part-time. Today, 63% of women receive benefits based on their husbands' earning history, because the spousal benefit (50% of the husbands' benefit) exceeds the worker benefit based on their own earnings history. The percentage of women relying on spousal benefits is expected to decline, but will remain high well into the 21st century; in 2060, 40% of women are projected to receive benefits as spouses rather than workers. In contrast to Social Security, benefits from individual accounts are directly related to the size of the individual's contribution and the return on investment. Protections for low earners could be devised; however, they would be more politically vulnerable than Social Security's integrated, progressive, social insurance approach. And it is unclear in several of the proposals for individual accounts whether protections for spouses, divorced spouses, and surviving spouses would be required -- and if so, how substantial they would be. About 20% of elderly widowed and divorced women are currently poor; they cannot afford a loss of benefits.
Social Security provides workers and their surviving spouses with benefits that are guaranteed for life and adjusted for inflation. These protections are especially important to women. Women live longer than men; over 70% of Americans age 85 and older are women. Women are thus at greater risk of outliving their savings, and of seeing other sources of income decline in value due to inflation. And women generally have lower savings than men, and are less likely to have pension income. Individual savings and investments are an important supplement to Social Security. But to the extent individual accounts substitute for guaranteed Social Security benefits, they put women's economic security at risk. To minimize the risk of losing their investments, women may choose to invest their smaller individual accounts conservatively; studies indicate that women currently invest more conservatively than men. But women then run the risk that their assets will not grow sufficiently to last through their lifetime, or even keep up with inflation. Women will be especially hard pressed to obtain through the market the lifetime protection that Social Security provides. Lifetime annuities can be purchased. But converting to to an annuity-- which is done all at once -- makes a woman's lifetime retirement benefits extremely sensitive to the state of the stock market at the time of the conversion. In addition, the costs of converting savings to an annuity are high. Economist Henry Aaron estimates that overall, 30 to 50% of the savings in an lRA or 401 (k) individual account converted to an annuity are lost to administrative and management fees and the cost of conversion. Few private annuities are indexed for inflation. And most private annuities -- unlike Social Security -- base monthly payments on gender, providing women with lower lifetime benefits for the same investment.
Social Security is not just a retirement program. It provides benefits for disabled workers, 40% of whom are women. And Social Security provides for the families of workers who become disabled or die. Nearly 4 million children receive Social Security survivors or disability benefits -- and 98% of the parents who receive benefits for caring for them are women. Individual accounts are designed to provide for retirement only. The savings in individual accounts will not protect families that must cope with a wage earner's disability or early death.
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