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entitled 'Retirement Security: Women Face Challenges in Ensuring
Financial Security in Retirement' which was released on October 11,
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Report to the Ranking Member, Special Committee on Aging, U.S. Senate:
United States Government Accountability Office:
GAO:
October 2007:
Retirement Security:
Women Face Challenges in Ensuring Financial Security in Retirement:
Retirement Security:
GAO-08-105:
GAO Highlights:
Highlights of GAO-08-105, a report to Ranking Member, Special Committee
on Aging, U.S. Senate.
Why GAO Did This Study:
Women aged 65 and over will account for a growing segment of the U.S.
population over the next several decades. Despite increases in women’s
workforce behavior in the past 65 years, elderly women have
persistently high rates of poverty. Thus, it is important to understand
the differences between men’s and women’s retirement income, and how
women may fare given future reforms to Social Security and pensions.
GAO was asked to examine (1) how women's retirement income compares
with men’s and the reasons for differences; (2) how certain life events
such as divorce, widowhood, and workforce interruptions affect women’s
retirement income; and (3) the possible effect on women’s retirement
income of certain changes to Social Security and pensions that seek to
mitigate the effects of differences in workforce participation
patterns.
To address these objectives, GAO reviewed the relevant literature,
interviewed academics and other retirement experts, and used a
microsimulation model to project future retirement income. GAO provided
a draft of this report to the departments of Labor and Treasury, the
Internal Revenue Service, and the Social Security Administration.
Cognizant agency officials provided technical comments which were
incorporated as appropriate.
What GAO Found:
In general, women have less retirement income than men, largely because
of women’s lower labor force attachment and lower earnings, on average.
Fewer women than men have income from most major retirement sources,
and women have less income from these sources. Women’s median Social
Security income is 70 percent of men’s. Also, fewer women than men have
pensions. Among the population age 65 and over who continue to work,
women earn just over half of what men earn. Women also have somewhat
smaller income than men from assets, such as interest and dividends.
Accordingly, rates of poverty among those 65 and over are substantially
higher for women than for men. Although their participation has
increased substantially in the last century, women still spend fewer
years in the labor force than men, and they more often work part-time.
Also, women tend to earn less than men, despite increases in their
wages over time relative to men. Although work patterns are key in
earnings differences, in prior work, we found that even after
accounting for behavioral differences such as education or labor force
participation, women still earn less than men.
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 women receive—and
leave women with fewer financial resources at retirement than men.
Social Security divorced spousal benefits are available only if the
marriage lasted at least 10 years. Furthermore, pension benefits are
available to a divorced spouse only under certain circumstances.
Women’s role as primary family caregiver for children and elderly
relatives can reduce their career earnings, on which retirement income
is based. Because women tend to live longer than men, widowhood and
costly long-term care assistance may further reduce their retirement
resources.
GAO’s simulations of some Social Security changes that would compensate
for low earnings or time out of the workforce showed that those changes
tend to increase benefits for beneficiaries overall, and particularly
those in lower income quintiles. Alternatively, 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. Some
pension changes that have been proposed in the past several years take
into account the changing labor force and norms of employer-provided
retirement plans; while these changes are gender-neutral, they may
provide important new opportunities for women to increase their
retirement income. For example, decreased vesting requirements may
provide additional pension income to those with intermittent workforce
participation who would not qualify for pension benefits under a longer
vesting schedule.
What GAO Recommends:
GAO is making no recommendations.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-105]. For more information, contact
Barbara Bovbjerg at (202) 512-7215 or bovbjergb@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Women Have Less Retirement Income than Men Largely because of
Differences in Labor Force Participation and Lifetime Earnings:
Certain Life Events May Reduce Women's Retirement Resources More Than
Men's:
Specific Changes to Social Security and Employer-Sponsored Pensions
Will Affect Women Differently than Men Because of Differences in
Lifetime Work Histories:
Implement Dependent Care Credits:
Increase Minimum Benefit:
Increase Survivor Benefits:
Reduce Spousal Benefits and Increase Survivor Benefits:
Reduce Duration of Marriage Requirement for Divorced Spouse Benefit
Eligibility:
Lowering Vesting Requirements:
Automatic Rollover upon Leaving Employment Prior to Retirement Age:
Concluding Observations:
Agency Comments:
Appendix I: Methodology:
Assumptions and Limitations:
Description of Simulated Social Security Modifications:
Description of Simulated Pension Modifications:
Data Reliability:
Benchmark Policy Scenarios:
Appendix II: Simulation Results for Social Security Modifications:
Appendix III: Low Benefit Avoidance Rates:
Appendix IV: Effect of Simulated Reform on Social Security System
Solvency:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Median Percentage Change in Benefits for Individuals Whose
Benefits Changed after Addition of the Dependent Care Credit--Promised
Benefits Benchmark:
Table 2: Percentage of Total Simulation Population Whose Benefits
Changed after Addition of the Dependent Care Credit--Promised Benefits
Benchmark:
Table 3: Median Percentage Change in Benefits for Individuals Whose
Benefits Changed after Addition of the Increased Minimum Benefit--
Promised Benefits Benchmark:
Table 4: Percentage of Total Simulation Population Whose Benefits
Changed after Addition of the Increased Minimum Benefit--Promised
Benefits Benchmark:
Table 5: Median Percentage Change in Benefits for Individuals Whose
Benefits Changed after Addition of Increased Survivor Benefits--
Promised Benefits Benchmark:
Table 6: Percentage of Total Simulation Population Whose Benefits
Changed after Addition of Increased Survivor Benefits--Promised
Benefits Benchmark:
Table 7: Median Percentage Change in Benefits for Individuals Whose
Benefits Changed after Addition of Decreased Spousal Benefits Paired
with Increased Survivor Benefits--Promised Benefits Benchmark:
Table 8: Percentage of Total Simulation Population Whose Benefits
Changed after Addition of Decreased Spousal Benefits Paired with
Increased Survivor Benefits--Promised Benefits Benchmark:
Table 9: Median Percentage Change in Benefits for Individuals Whose
Benefits Changed after Reduction in Marriage Requirement from 10 to 7
Years--Promised Benefits Benchmark:
Table 10: Percentage of Total Simulation Population Whose Benefits
Changed after Reduction in Marriage Requirement from 10 to 7 Years--
Promised Benefits Benchmark:
Table 11: Median Percentage Change in Pension Benefits for Individuals
Born in 1985 Whose Benefits Changed After Lowered Vesting Schedules46:
Table 12: Percentage of Total Simulation Population Whose Benefits
Changed after Implementation of Lowered Vesting Schedules:
Table 13: Median Percentage Change in Pension Benefits for Individuals
Born in 1985 Whose Benefits Changed after Implementation of 100 Percent
Automatic Rollover:
Table 14: Percentage of Total Simulation Population Whose Benefits
Changed after Implementation of 100 Percent Automatic Rollover:
Table 15: Summary of Benchmark Policy Scenarios:
Table 16: Summary of Benchmark Policy Scenario Parameters:
Table 17: Simulation Results of the Dependent Care Credit under
Alternative Benchmark Scenarios, for the 1950 and 1985 Birth Cohorts:
Table 18: Simulation Results for Dependent Care Credit by Income
Quintile under Alternative Benchmark Scenarios, for the 1950 and 1985
Birth Cohorts:
Table 19: Simulation Results for Dependent Care Credit by Marital
Status under Alternative Benchmark Scenarios, for the 1950 and 1985
Birth Cohorts:
Table 20: Simulation Results for Increased Survivor Benefit Only under
Alternative Benchmark Scenarios, for the 1950 and 1985 Birth Cohorts:
Table 21: Simulation Results for Increased Survivor Benefit Only by
Income Quintile under Alternative Benchmark Scenarios, for the 1950 and
1985 Birth Cohorts:
Table 22: Simulation Results for Increased Survivor Benefit Only by
Marital Status under Alternative Benchmark Scenarios, for the 1950 and
1985 Birth Cohorts:
Table 23: Simulation Results for Increased Survivor Benefit and
Decreased Spouse Benefit under Alternative Benchmark Scenarios, for the
1950 and 1985 Birth Cohorts:
Table 24: Simulation Results for Increased Survivor Benefit and
Decreased Spouse Benefit by Income Quintile under Alternative Benchmark
Scenarios, for the 1950 and 1985 Birth Cohorts:
Table 25: Simulation Results for Increased Survivor Benefit and
Decreased Spouse Benefit by Marital Status under Alternative Benchmark
Scenarios, for the 1950 and 1985 Birth Cohorts:
Table 26: Simulation Results for Reduced Marriage Requirement for
Divorced Spouse Benefits under Alternative Benchmark Scenarios, for the
1950 and 1985 Birth Cohorts:
Table 27: Simulation Results for Reduced Marriage Requirement for
Divorced Spouse Benefits by Income Quintile under Alternative Benchmark
Scenarios, for the 1950 and 1985 Birth Cohorts:
Table 28: Simulation Results for Reduced Marriage Requirement for
Divorced Spouse Benefits by Marital Status under Alternative Benchmark
Scenarios, for the 1950 and 1985 Birth Cohorts:
Table 29: Simulation Results for Increased Minimum Benefit under
Alternative Benchmark Scenarios, for the 1950 and 1985 Birth Cohorts:
Table 30: Simulation Results for Increased Minimum Benefit by Income
Quintiles under Alternative Benchmark Scenarios, for the 1950 and 1985
Birth Cohorts:
Table 31: Simulation Results for Increased Minimum Benefit by Marital
Status under Alternative Benchmark Scenarios, for the 1950 and 1985
Birth Cohorts:
Table 32: Average Low Benefit Avoidance Rates Before and After
Modifications for Individuals with Less Than 100 Percent Low Benefit
Avoidance Pre-Modification:
Table 33: Changes in the 75-year Actuarial Balance as a Percentage of
Taxable Payroll resulting from Program Modifications, after Achieving
75-Year Solvency with Benchmark Scenarios:
Figures:
Figure 1: Life Expectancy at Age 65, 1940 to 2006 and Projected 2007 to
2085:
Figure 2: Men and Women Aged 65 and Over: Number and Percent of the
Total U.S. Population, Projections 2000 to 2050:
Figure 3: Percentage of the Population Age 65 and Older Receiving
Income from Various Sources, 2004:
Figure 4: Median Annual Income of the Population Age 65 and Older,
2004:
Figure 5: Poverty Rates among People Age 65 and Older by Marital
Status, 2004:
Figure 6: Overall Labor Force Participation Rate of Men and Women Age
16 and Older, 1950-2006:
Figure 7: Women's Median Earnings For Full-time, Year-Round Work as a
Percentage of Men's, 1960 to 2005:
Figure 8: Marital Status of the Population Age 65 and Older, 2005:
Abbreviations:
AIME: Average Indexed Monthly Earnings:
CSSS: Commission to Strengthen Social Security:
DB: defined benefit:
DC: defined contribution:
ERISA: Employee Retirement Income Security Act of 1974:
GEMINI: Genuine Microsimulation of Social Security and Accounts:
IRA: individual retirement account:
MTR: Maintain Tax Rates:
OASDI: Old-Age, Survivors, and Disability Insurance:
OCACT: Social Security Administration's Office of the Chief Actuary:
OLC: overlapping cohorts:
PENSIM: Pension Simulator:
PIA: Primary Insurance Amount:
PSG: Policy Simulation Group:
QDRO: qualified domestic relations order:
RCS: representative cohort sample:
REA: Retirement Equity Act:
SPIA: Special Primary Insurance Amount:
SSA: Social Security Administration:
SSASIM: Social Security and Accounts Simulator:
SSI: Supplemental Security Income:
United States Government Accountability Office:
Washington, DC 20548:
October 12, 2007:
The Honorable Gordon Smith:
Ranking Member:
Senate Special Committee on Aging:
United States Senate:
Dear Senator Smith:
Over the next 40 years women aged 65 and over will account for a
growing segment of the U.S. population. In 2000, there were about 20
million women aged 65 and over, more than 7 percent of the U.S.
population; by 2050 that number is estimated to grow by nearly 28
million to about 12 percent of the population. Elderly women have
persistently high rates of poverty, and the major source of income for
many retired women is Social Security. However, the Social Security
system is affected by the decrease in the rate of growth of the working
age population. Under current law, the Social Security Trustees project
that by 2041 the Social Security Trust Funds could be insufficient to
pay full benefits.[Footnote 1]
Demographics as well as rising health care costs are profoundly
affecting not only the Social Security system, but also Medicare,
private pension and health benefits, and personal savings in ways that
will likely present serious challenges to ensuring financial security
for future retirees and, ultimately, the economic security of the
nation. In recent years, many proposed reforms of the Social Security
system have focused on long-term solvency and financing issues, many of
which could result in decreased benefits for individuals.
Alternatively, some Social Security proposals developed over the past
several decades include elements that seek to modify the program and
address its limitations when applied to nontraditional-family or
earnings structures. These limitations may be due both to the evolving
nature of families and to changes in women's labor force participation
that have emerged since Social Security's creation.[Footnote 2] These
elements often address the needs of two-earner families as well as
retirement benefits after divorce. Additionally, recent and ongoing
changes in employer-sponsored pension plans, most notably the shift
from defined benefit pension plans to defined contribution plans, may
complement changes in workforce patterns, but also place greater
responsibility for prudent savings and investment decisions on workers.
Given the existing differences in men's and women's incomes, and the
changes in women's workforce behavior in the later half of the 20th
century, any future changes to Social Security as well as both proposed
and ongoing changes to employer-provided pensions could have different
impacts on women and men. It is important to understand how each will
fare under various proposals.
You asked us to help clarify what drives the gap in retirement income
between men and women and to provide information on the implications of
different modifications to both Social Security as well as employer-
provided pensions. Our objectives were to examine (1) how women's
retirement income compares with men's and describe the reasons for
differences; (2) how certain life events such as divorce, widowhood,
and workforce interruptions affect women's retirement income, as
compared with men's; and (3) the possible effect on women's retirement
income of certain changes to Social Security and pensions that seek to
mitigate the effects of differences in workforce participation
patterns.
To address these objectives, we reviewed the relevant literature and
federal laws, interviewed academics and other retirement experts, and
used a retirement-income microsimulation model to project women's
future retirement income.[Footnote 3] Specifically, we reviewed and
summarized government and academic research on women's retirement
income, life events, and poverty as well as proposed changes to Social
Security and employer-provided pensions. We used the Policy Simulation
Group's retirement income microsimulation model to illustrate
differences in benefit levels by differences in workforce attachment
and marital status of a simulated population, born in 1985. We also
used the microsimulation model to project changes in Social Security
benefit levels for a sample of workers at age 70, from the 1950 and
1985 birth cohorts, under a variety of possible modifications. The
results of our analyses reflect outcomes for individuals in the
simulated populations and do not attempt to estimate outcomes for an
actual population. Unlike some of our prior work, rather than
evaluating Social Security reform packages that seek to achieve
sustainable solvency, we evaluated proposed individual changes targeted
to enhance benefits for certain groups. We also used the model to
project changes in pension benefit levels for a sample of workers at
age 70, from the 1985 birth cohort.[Footnote 4] We used two cohorts in
order to identify differences in the effects of the changes that could
be due to variations in labor force participation across generations.
For some of our analyses, we used a measure of income that adjusts to
account for household size and economies of scale. The adjustment is
made by dividing household benefit levels by a "family equivalence
scale."[Footnote 5] We did this to facilitate comparisons between non-
married persons and married persons, whose household income includes
income from both spouses that can vary significantly between
them.[Footnote 6] We also evaluated the effect of modifications on
individual benefit levels. In addition to evaluating changes in benefit
levels resulting from each modification, we assessed changes in a
variable in the model that serves as a proxy for poverty
avoidance.[Footnote 7] Consistent with our past work on Social Security
reform, when simulating benefits we compared benefits under each reform
to two hypothetical benchmark policy scenarios that would achieve 75-
year solvency, one by only increasing payroll taxes (which simulates
"promised benefits") and the other by only reducing benefits (which
simulates "funded benefits").[Footnote 8] However, unlike prior GAO
work, for the purposes of this study, we evaluated certain specific
individual modifications, rather than comprehensive reform packages. We
did this in order to focus on modifications that account for more
recent changes in family structure and labor force composition.
Additionally, to facilitate comparisons across cohorts, we generally
report the effect of each modification in terms of percent changes in
benefit levels. Using such a measure, the outcomes from each benchmark
are largely similar. In the body of the report, in most cases, we
present output from simulations using the "promised benefits"
benchmark. Detailed output from both benchmarks is presented in
appendix II. For this report, we focused on examining the distribution
of benefits and did not assess equity measures. While our simulations
provide estimates of future retirement income, there is a considerable
amount of uncertainty involved with these estimates. Since these
estimates could change significantly, depending on assumptions used and
behavioral responses, they should not be considered predictions.
We conducted our work between January 2006 and August 2007 in
accordance with generally accepted government auditing standards. A
more detailed discussion of our scope and methodology appears in
appendix I.
Results in Brief:
Generally, women have less retirement income than men, largely because
of women's lower labor force attachment and lower earnings, on average.
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. Not surprisingly, older women are
more often poor than men. Among those 65 and over, 12 percent of women
are in poverty, compared to 7 percent 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 percent in 1960 to 61 percent 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 percent of what men earned for
full-time, year-round work in 2005. Although work patterns are key in
earnings differences, in prior work we found that even after accounting
for these and other behavioral differences--such as educational
attainment--women still earn less than men.
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. Further, at retirement, Social
Security divorced-spouse benefits are available only if the marriage
lasted at least 10 years. 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. Social Security
income is reduced at the household level upon the death of a spouse,
and widows do not often retain all of their husbands' pension benefits.
In part because of their longer average life spans, with age, women are
also more likely than men to become disabled and need long-term care,
further increasing demand upon their retirement resources.
Our 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. Some of the proposed changes to
Social Security that we analyzed are in fact designed to increase the
benefits of targeted groups by taking advantage of differences in
workforce participation patterns. On one hand, our 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. For example, when we simulated a dependent care credit to
compensate for zero or low earnings when children are young, benefits
increased across the board for women in all marital statuses and in all
income quintiles. On the other hand, 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. For
example, our simulation of a reduction in Social Security's marriage
eligibility rule had a narrowly focused impact on a very small number
of women and almost no men. Some pension rule changes that have been
proposed or passed into law in the past several years take into account
changes in the labor force and the changing norms of employer-provided
retirement plans; while these changes are gender-neutral, they may
provide important new opportunities for some women to increase their
retirement income. For example, when we simulated a pension change that
would ensure that 100 percent of retirement account balances would roll
over to another qualified account when individuals switched jobs
(rather than allowing some or all of the balance to be withdrawn or
spent), among those affected, women had larger median percentage
changes than men, and among women, never-married and divorced women had
the largest median percentage changes in pension income.
The departments of Labor and the Treasury and the Social Security
Administration provided technical comments which we incorporated as
appropriate.
Background:
The retirement outlook for both men and women in the United States has
changed significantly in the last 30 years. Like many industrialized
countries, the United States is undergoing a significant demographic
shift toward an aging population and is experiencing the increased
pressures on the social insurance, medical, and private pension systems
that this shift creates.
While life expectancy in the United States has steadily increased over
the last 50 years, birthrates have declined, and both have led to rapid
growth in the proportion of the population comprised of elderly people:
in 1950, those aged 65 or older made up 8 percent of the population; in
2000, this proportion rose to 12 percent and is projected to rise to
almost 20 percent by 2030. Also, between 1940 and 1980, women's life
expectancy generally increased faster than men's. During the same time
period, the difference in life expectancy at age 65 for women and men
grew from 1.5 years in 1940 to 4.4 years in 1980. (See fig. 1.)
Figure 1: Life Expectancy at Age 65, 1940 to 2006 and Projected 2007 to
2085:
[See PDF for image]
Source: Social Security Administration.
Note: Data for 2004 through 2006 are preliminary or estimated. The
period life expectancy at a given age for a given year represents the
average number of years of life remaining if a group of persons at that
age were to experience the mortality rates for that year over the
course of their remaining lives.
[End of figure]
The difference in men's and women's longevity has decreased over the
past 25 years, and that difference is expected to remain stable
throughout much of the 21st century. Nevertheless, the ratio of elderly
women to elderly men increased substantially in the post-World War II
era, and elderly women will continue to outnumber elderly men both in
numbers and as a percent of the population for the foreseeable future.
(See fig. 2.) As a result of these trends, women can expect on average
to spend more years in retirement than men.
Figure 2: Men and Women Aged 65 and Over: Number and Percent of the
Total U.S. Population, Projections 2000 to 2050:
[See PDF for image]
Source: U.S. Census Bureau, Demographic Trends of the 20th Century.
Note: Percentage values over each bar show the total U.S. population
represented by each bar.
[End of figure]
Traditionally, the financial resources that provide retirement security
have been characterized as a three-legged stool: Social Security,
pensions, and savings, although increasingly, earnings are also a
significant source of income for the elderly. Overall, women have been
more likely than men to rely on Social Security to finance their
retirement. Moreover, some aspects of the Social Security system
particularly benefit women. For instance, because women tend to have
lower lifetime taxable earnings than men, they benefit from the Social
Security system's progressive benefit formula, which replaces a larger
portion of lifetime earnings for people with low earnings than for
people with high earnings. In addition, Social Security is designed
specifically to accommodate both low-or non-earning spouses, often
women, by providing them with a dependent benefit based upon their
spouses' earnings. Social Security was created based upon the model of
a single-earner married couple family structure, and while many women
still never enter the paid workforce or choose to reduce their
workforce participation, at least in part to care for children or other
family members, the single-earner family model no longer describes the
typical American household. Nevertheless, this structure has been and
continues to be extremely beneficial to some women.
However, Social Security faces a long-term financing shortfall
resulting largely from longer life spans and lower birthrates.
According to 2007 Social Security projections,[Footnote 9] absent
policy changes, Social Security tax revenue is expected to fall short
of benefit payments for the first time in 2017; by 2041 the system may
have inadequate resources to pay full benefits. As a result, in the
future, Social Security's role could change. Reductions in scheduled
benefits and/or increases in program revenues will be needed to restore
the long-term solvency and sustainability of the program. Within the
program's current structure, possible benefit changes might include
changes to the benefit formula or reductions in cost-of-living
increases, among other options; revenue increases might include
increases in payroll taxes or transfers from the Treasury's general
fund.[Footnote 10] In addition, many proposals have been put forth over
the past several decades to address the adequacy of Social Security
benefits for different kinds of workers and their families. These
proposals often address the needs of spouses, survivors, and low
earners as well as those with significant workforce interruptions.
Additionally, many workers bear greater risk and responsibility for
their retirement savings than in the past. About half of U.S. workers
do not have a pension plan through their employer, and those who do are
less likely than in the past to be covered by defined benefit (DB)
plans. Among those who offer plans, employers have increasingly shifted
from traditional DB to defined contribution (DC) plans, such as
401(k)s, which are based on contributions to and investment returns on
individuals' accounts. While private sector DB plans must offer a
guaranteed lifetime income in the form of an annuity, DC plans more
often provide the beneficiary with a lump sum as the only
option.[Footnote 11] While individuals could take the proceeds of their
lump sum and purchase an annuity, the cost of purchasing a private
annuity may make this option unattractive to many households. In
addition, the private equity market charges women a higher premium for
a life annuity than it charges men of the same age, because on average
women live longer than men.[Footnote 12]
Personal savings have traditionally been an important source of
retirement income. Unfortunately, despite the challenges facing both
public and private benefit systems for the elderly, relatively few
Americans are currently saving, and some research suggests that women
have less in savings than men. According to some measures, America has
the lowest overall saving rate of any major industrialized nation. The
U.S personal saving rate as a percentage of disposable personal income
has recently reached levels not seen since the Great Depression,
falling below 1 percent in 2005 and 2006.[Footnote 13] A variety of
proposals seeking to encourage more individuals to save have been
introduced in the past several years. Many of these proposals target
low-and moderate-income workers who are least likely to have access to
employer-sponsored pension plans. Some of these proposals create added
incentives or ease access for individuals to save through existing
savings vehicles, such as 401(k) plans or individual retirement
accounts (IRA). Other plans would create new vehicles for savings, such
as 401(k) type plans for those not currently covered by a plan. One
mechanism that already exists to encourage individuals to save is the
so-called spousal IRA offered to non-earning spouses, who are most
often women, as a way to build retirement income. A spousal IRA, allows
non-earning spouses to accumulate retirement savings in their own
retirement accounts.[Footnote 14]
Finally, health care coverage and rising health costs have added to the
financial burden for retirees. Retired Americans often rely on employer-
sponsored health benefits to provide health coverage until they become
eligible for Medicare or to supplement their Medicare coverage. In 2005
about 37 percent of retirees were covered by such plans.[Footnote 15]
However, retirees are paying more for these benefits, and the number of
private employers offering them has declined considerably.[Footnote 16]
The rate of growth of health care costs has generally outpaced the rate
of U.S. economic growth, and this trend is likely to continue,
jeopardizing the availability of employer- sponsored insurance for
many. Rapidly rising health care costs may be particularly burdensome
for retirees with limited financial resources. Additionally, the odds
of having a disability or chronic illness increase with age; since, on
average, women live longer, dealing with the cost of declining health
may be a particular concern for women.
Women Have Less Retirement Income than Men Largely because of
Differences in Labor Force Participation and Lifetime Earnings:
Generally, women have less retirement income than men, largely because,
on average, women have lower labor force attachment and lower earnings
than men. While about 90 percent of men and women aged 65 and older
receive Social Security benefits, fewer women than men have income from
most other major sources of retirement income,[Footnote 17] and they
receive less than men from those sources, according to a Congressional
Research Service analysis of Census Bureau data.[Footnote 18]
Additionally, women aged 65 and older have higher rates of poverty than
men of the same age. While women's labor force participation has
increased substantially in the last half century, it has flattened out
in recent years and remains more intermittent than men's. Women also
tend to earn less than men during their working years.
Women Have Less in Total Retirement Income than Men:
While Social Security provides retirement income to almost 90 percent
of all elderly people, a smaller percentage of women than men age 65
and older have additional income from pensions, assets--such as
interest or dividends from lifetime savings, or earnings, according to
the Congressional Research Service analysis of Census Bureau
data.[Footnote 19] For example, in 2004, the percentage of men with
income from pensions was almost twice that of women and 44 percent more
men than women had wage and salary income. (See fig. 3.)
Figure 3: Percentage of the Population Age 65 and Older Receiving
Income from Various Sources, 2004:
[See PDF for image]
Source: Congressional Research Service analysis of the Census Bureau's
Current Population Survey data.
[End of figure]
Moreover, women's median incomes from each of the various retirement
sources are lower than men's. As shown in figure 4, men's median annual
Social Security income was $12,583 in 2004, while women's was $8,799.
Nevertheless, Social Security is an important financial resource for
women, many of whom receive spousal, divorced spousal, or survivor
benefits. According to the Social Security Administration (SSA), while
Social Security is the largest single source of income for most of the
elderly population age 65 and older, it represents 53 percent of total
income for elderly unmarried women--including divorced, widowed, and
never married women, compared to 38 percent for unmarried men.
Moreover, Social Security was nearly the only source of income for
close to half of all elderly unmarried women who received it in 2004,
compared to a little more than a third of elderly unmarried men.
Importantly, Social Security can become a growing fraction of total
retirement income over time since it is indexed to offset the effects
of inflation. In contrast, private pensions and income from assets are
rarely indexed. Unlike Social Security, pension income may end upon the
death of the spouse if the retired worker elects to receive a single
life annuity,[Footnote 20] in which payments cease at the time of the
worker's death.[Footnote 21]
The difference between men's and women's pension income is larger than
for Social Security. In 2004, men's median pension income was nearly
twice women's, $12,000 and $6,141, respectively. Asset income is
relatively low for both women and men compared to Social Security and
pensions. Nevertheless, women's median asset income was $750, while
men's was slightly higher at $964. Finally, while less than a fifth of
the elderly had wage and salary earnings in 2004, men's median earnings
were $20,800, while women's were $12,000. (See fig. 4.)
Figure 4: Median Annual Income of the Population Age 65 and Older,
2004:
[See PDF for image]
Source: Congressional Research Service analysis of the Census Bureau's
Current Population Survey data.
[End of figure]
Additionally, rates of poverty among those 65 and over are higher for
women than for men.[Footnote 22] Over time, overall poverty rates among
the elderly have declined from 35 percent in 1959 to 10 percent in
2005, according to Census Bureau data. This is in part due to Social
Security benefits for the aged. Here, too, gender differences remain.
In 2004, 12 percent of women and 7 percent of men age 65 and older had
incomes below the federal poverty level, with more pronounced variation
among individuals of different marital status. For example, never-
married elderly men and women had the highest rates of poverty, while
the next highest rates were among divorced and widowed elderly women.
Married couples had significantly lower rates than all other marital
statuses. (See fig. 5.) Moreover, almost 21 percent of women age 65 and
older who lived alone were poor, in comparison to almost 15 percent of
men who lived alone.
Figure 5: Poverty Rates among People Age 65 and Older by Marital
Status, 2004:
[See PDF for image]
Source: Social Security Administration.
[End of figure]
Women Have More Intermittent Work Histories and Lower Earnings than
Men:
Women's labor force participation increased substantially in the latter
half of the 20th century, although women continue to work fewer total
years than men and more often work part-time. While women's
participation in the labor force increased from the mid-1960s through
the late 1990s, men's labor force participation has steadily decreased,
most significantly between the mid-1950s and the early-1970s.[Footnote
23] (See fig. 6.)
Figure 6: Overall Labor Force Participation Rate of Men and Women Age
16 and Older, 1950-2006:
[See PDF for image]
Source: U.S. Department of Labor, Bureau of Labor Statistics.
[End of figure]
Much of the change in women's participation rates is due to higher
labor force participation rates among married women. According to
Census Bureau statistics, between 1960 and 1995 married women's labor
force participation increased from almost 32 to 61 percent and has not
changed significantly in the past decade. As a result, there are now
more married couple households with two earners than when Social
Security was first established. These overall trends have recently
stabilized, and in 2006 the Bureau of Labor Statistics predicted that
women's labor force participation rate will not change significantly in
the near future.[Footnote 24]
Despite the overall increases in women's labor force participation,
women continue to have more intermittent labor force participation than
men. As we reported in 2003, women have fewer years of work experience,
work fewer hours per year, are less likely to work a full-time
schedule, and leave the labor force for longer periods of time than
men.[Footnote 25] For example, 25 percent of women and almost 11
percent of men age 16 and older usually worked part-time in
2005.[Footnote 26]
In addition to their spending less time in the workforce overall, women
earn less than men when they are working.[Footnote 27] Although women's
earnings have risen relative to men's over time, women nevertheless
continue to earn less than men. According to Census Bureau data, in
2005, women earned 77 percent of what men earned for full-time, year-
round work. (See fig. 7.)
Figure 7: Women's Median Earnings For Full-time, Year-Round Work as a
Percentage of Men's, 1960 to 2005:
[See PDF for image]
Source: U.S. Census Bureau.
Note: Based on median earnings of full-time, year-round workers 15
years old and over. Before 1989 earnings are for civilian workers only.
[End of figure]
This difference may be due, in part, to the fact that women continue to
take primary responsibility for family care and those who work outside
the home may trade some career advancement for schedule flexibility. In
fact, in prior work we found that work patterns are a key factor in
explaining the differences in men's and women's earnings. However, even
after accounting for these and other behavioral factors--such as
educational attainment--unexplained differences remained.[Footnote 28]
Changes in women's labor force participation have also increased their
participation in employer-provided pension plans, according to one
study,[Footnote 29] though, as noted earlier, their overall rates of
participation are still lower than men's. Women who worked full-time
throughout the year actually had higher pension participation rates
than men with similar work schedules in 2005,[Footnote 30] but women's
overall rates remain lower because, in part, of their lower rate of
full-time work and lower earnings, according to the Employee Benefit
Research Institute. While the increase suggests that a larger share of
women in younger cohorts will likely qualify for pensions based on
their own earnings, many women may continue to receive spousal or
survivor benefits through their husbands' pensions. In addition, the
general shift from DB to DC plans may have both positive and negative
consequences for women. Women may especially benefit from the greater
portability afforded by DC plans because of their more intermittent
labor force participation. However, another consequence of this general
shift is that with many DC plans, individuals have a greater
responsibility to make prudent investment decisions and to make their
retirement savings last over their lifetimes, which for women, on
average, are longer than for men.
Changes in women's labor force participation have also increased the
percentage of women who are insured under Social Security based on
their own work history, even though many women continue to receive
dependent benefits as spouses. According to SSA, women who were
eligible to receive benefits based on their own work records increased
from 22 percent to 84 percent between 1950 and 2006. Nevertheless, in
December of 2005, approximately 60 percent of retired women received
Social Security benefits based, at least in part, on their marital
history.[Footnote 31] Moreover, nearly all spousal and survivor
beneficiaries were women in 2005. Further, as women's labor force
participation increases, many will find that benefits based on their
own work records are more generous than the spousal benefit. However,
when many of these same women become widows, they will likely begin to
collect benefits based on their marital status, as the survivor's
benefit, at 100 percent of their deceased spouse's benefit, is likely
to be greater than their own.
Data on current retirees reflect the fact that those retirees comprise
older generations of workers, in which women's labor force
participation rates were lower than those of current workers. In the
future, data that include later generations of women, with greater
labor force participation rates, may show greater percentages of women
eligible for and collecting benefits based on their own work records.
Nevertheless, the key factor contributing to the difference in men's
and women's Social Security income levels will continue to be the
difference in their lifetime work histories and earnings. Women's
continued intermittent labor force participation and lower median
earnings than men's result in lower benefit amounts, even though Social
Security replaces a greater percentage of preretirement earnings for
lower-wage workers.[Footnote 32]
Certain Life Events May Reduce Women's Retirement Resources More Than
Men's:
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 exacerbate the deficiency of women's
financial resources in retirement. Divorce often results in economic
loss for both men and women, but women tend to experience more economic
loss than men. In addition, women are most often the family members who
provide unpaid care, which can reduce their career earnings as well.
The death of a spouse can also reduce retirement income for the
survivor, and because they generally live longer, women have higher
rates of widowhood than men at older ages. While declining health at
older ages has significant implications for both men's and women's
financial security, because of life expectancy differences, women more
often require costly long-term care assistance.
Divorce May Reduce Women's Retirement Income:
Research has shown that married couples generally have greater
household wealth than nonmarried men and women and that marital
disruption negatively affects both men's and women's economic
statuses.[Footnote 33] While divorce may result in a reduced standard
of living for both men and women, divorced women, as a group,
experience more economic loss than divorced men.[Footnote 34] For
example, the Census Bureau reported that in 2001, 23 percent of
recently divorced women, in comparison to nearly 8 percent of recently
divorced men, had income below the poverty level.[Footnote 35] One
study found that marital disruption, including divorce, resulted in a
substantial drop in women's income and loss of assets.[Footnote 36]
Another study projected in 2000 that most divorced women are more
likely than never-married, married, and widowed women to be in the
bottom 40 percent of the income distribution at age 67.[Footnote 37] As
shown in figure 5, elderly divorced women have higher rates of poverty,
at over 20 percent, than elderly divorced men, at 12 percent.
In retirement, divorce has the potential to reduce Social Security
benefits because Social Security's eligibility rules require that the
marriage last at least 10 years for a divorced spouse to claim benefits
from an ex-spouse's earnings record.[Footnote 38] However, Census
Bureau data from 2001 show that more than half of first and second
marriages that ended in divorce lasted less than 10 years.[Footnote 39]
Unlike Social Security benefits, divorced spouses can, under certain
circumstances, receive all or part of their former spouses' private
pension benefits, regardless of the marriage's duration. Although the
Employee Retirement Income Security Act of 1974 (ERISA)[Footnote 40]
generally does not allow workers to assign their benefits to another
person in this way, Congress amended the law in 1984 through the
Retirement Equity Act (REA)[Footnote 41] to permit the payment of
pension benefits to a worker's former spouse under a qualified domestic
relations order (QDRO). A QDRO, which meets certain statutory
requirements, including approval by a court and the plan administrator,
may be used to satisfy certain obligations, such as child support,
alimony, or the division of marital property.[Footnote 42] However, the
worker's pension benefits may be reduced. Additionally, women often
forgo the protection provided by QDRO's. This may happen for a variety
of reasons, in some cases women may be unaware that their spouses are
covered by a pension, while others may not know that they can receive
benefits while their spouses are alive.
Family Caregiving, Which Can Reduce Lifetime Earnings, Is More Common
for Women Than for Men:
Family caregiving, which encompasses important child care and elder
care responsibilities, is more often provided by women. In order to
meet these family needs, some caregivers reduce work hours or leave the
labor force altogether. For example, one Census Bureau study shows that
45 percent of women who worked during pregnancy with their first child
between 1996 and 2000 took unpaid leave and one-quarter quit their
job.[Footnote 43] Bureau of Labor Statistics data indicate that, among
parents with children under age 6, almost 92 percent of fathers,
compared to over 58 percent of mothers, were employed in 2005.[Footnote
44] Research shows that in addition to caring for children, women
provide unpaid care for a family member or friend more often than men.
In 2002, daughters or daughters-in-law provided care to frail, older
adults living in the community more often than sons or sons-in-law,
according to one study.[Footnote 45] Similarly, another study found
that employed women were more likely than employed men to provide care
for a child, spouse, or partner with a disability.[Footnote 46]
Finally, one study reported that wives tend to reduce their work hours
when a husband experiences a severe health shock, such as a
stroke.[Footnote 47]
Caregiving can negatively affect the provider's career earnings and,
consequently, retirement income. Although many caregivers are employed,
research shows that caregivers can experience substantial losses in
career development and workforce earnings as well as significant out-
of-pocket expenses.[Footnote 48] For example, one study showed that
women age 46 and older who began caregiving for elderly relatives
between 1987 and 1992 experienced an average of over $3,000 loss in
annual earnings.[Footnote 49] Another study showed that over half of
caregivers who worked while providing care reported that this role
required them to adjust their work schedules, such as arriving late, or
even quit work. Furthermore, years spent out of the paid labor force
can reduce a worker's Social Security benefit amount. Moreover, one
study found that caregiving for adult parents can raise women's risk of
poverty in later years.[Footnote 50]
Women Are More Likely to Experience Widowhood, Which Puts Them at Risk
for Poverty:
Older women are several times more likely than older men to experience
widowhood. For example, in 2004 women age 65 and older were as likely
to be widowed as married, while men were 5.5 times more likely to be
married than widowed. (See fig. 8.)
Figure 8: Marital Status of the Population Age 65 and Older, 2005:
[See PDF for image]
Source: U.S. Census Bureau.
Note: "Married" refers to now married, except separated.
[End of figure]
Despite changes to the Social Security system in the 1970s that
improved widows' financial outcomes, research shows that widows
continue to be at risk for poverty in old age.[Footnote 51] As noted
earlier, widows age 65 and older had over three times the poverty rate
of married women or men in 2004. Widowhood may cause Social Security
and pension income to decrease at the household level, which can be a
hardship if certain fixed costs, such as housing, remain the same. More
specifically, household Social Security income is reduced by one-third
if the couple's benefits had been based on one spouse's work history
and by up to 50 percent if both spouses had been receiving retired
worker benefits.[Footnote 52] In addition, pension income is likely to
be reduced for the surviving spouse.
The REA helped protect spouses and widows by requiring employers to
obtain a spouse's written consent in order for a worker to decline the
joint and survivor annuity default option. A common default for the
joint and survivor annuity provides a 50 percent benefit level to the
surviving spouse. However, the shift from DB pension plans to DC
pension plans has the potential to provide even less income security
for widows who rely on a spouse's pension income. Although DC plans
generally must provide that an employee's vested account balance is
payable in full on death to the surviving spouse, the employee may,
during his or her lifetime, make withdrawals from the account or roll
over the balance into an IRA without spousal consent.
Figure: Simulated Retirement Income for Women with Varying Workforce
Attachment and Marital Status:
To illustrate the potential impact of workforce attachment and marital
status on women’s retirement income, we used the Policy Simulation
Group’s retirement income models to estimate Social Security and
pension income for individuals in a sample of a simulated 1985 birth
cohort at ages 67 and 85. The Policy Simulation Group's model
incorporates information on the estimated effects of various factors on
retirement income and is useful for illustrating potential differences
in outcome under the current policy environment. (For a discussion of
limitations of the model, see app. I.)
The simulation projected that women who worked full-time for 36 or more
years would have median annual Social Security benefits of nearly
$25,000 at age 67, while those who worked full-time between 1 and 5
years had a median annual benefit of about $13,000. In another example,
median annual pension benefits for women who worked full-time for 36 or
more years were almost $21,000, while median pension benefits among
women with 1 to 5 years of full-time work were less than $900.
The simulation also projected that among those who had worked for at
least 36 years, married women’s median Social Security benefits were
over $26,000 at age 67 and widow’s benefits were slightly lower. Median
benefit levels for divorced women were nearly $22,000 and for never
married women, just over $20,000. Also, median Social Security benefit
levels for women in our simulated sample who were married and worked
between 1 and 5 years were nearly $17,000, while those of never married
women with similar work histories were not quite $9,000.
Among women who worked for at least 36 years, the simulation projected
that married women’s median pension benefits were about $19,000 at age
67 and widow’s benefits were just over $24,000. Median benefit levels
for divorced women were over $21,000, and for never married women, over
$20,000. In addition, median pension benefit levels for women in our
simulated sample who were married and worked full-time between 1 and 5
years were over $2,000, while those of never married or divorced women
who had worked full-time between 1 and 5 years in general did not have
any pension income.Source: GAO analysis of GEMINI and PENSIM data.Note:
All dollar values are in 2007 dollars.
[See PDF for image]
Source: GAO analysis of GEMINI and PENSIM data.
Note: All dollar values are in 2007 dollars.
[End of figure]
Health Care Costs May Deplete Elderly Women's Retirement Resources:
Declining health at older ages has significant implications for women's
financial security. At least in part because women have longer average
life spans than men, women are more likely than men to become disabled
and need long-term care as they age. In 2003, among Medicare enrollees
age 65 and older, more women than men reported an inability to perform
at least one of five certain physical functions, such as the ability to
walk two to three blocks.[Footnote 53] Women are significantly more
likely than men to develop severe disabilities, and one study estimated
that women age 65 have a 44 percent chance of entering a nursing home,
compared to 27 percent for men.[Footnote 54] Women represented 72
percent of all nursing home residents in 1999 and 70 percent of home
care consumers in 2000.[Footnote 55] Research shows that nursing home
entry has important financial consequences for the elderly, especially
for unmarried women.[Footnote 56] In 2006, Genworth Financial estimated
that the average annual cost for nursing home care was $70,912 and for
assisted living facilities, $32,294.[Footnote 57] In addition, out-of-
pocket medical costs during the last years of a spouse's life can
deplete the couple's resources substantially and contribute to poverty
among surviving spouses, who are most often widows.[Footnote 58]
Specific Changes to Social Security and Employer-Sponsored Pensions
Will Affect Women Differently than Men Because of Differences in
Lifetime Work Histories:
The specific changes to Social Security and pensions that we modeled
had different effects on women and men, and among different subgroups
of women, because of differences in lifetime work histories. Some of
the proposed modifications to Social Security that we analyzed are in
fact designed to increase the benefits of targeted groups by accounting
for differences in workforce participation patterns. On one hand, our
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, our results showed that
modifications that focus on changes in family structure, such as more
two-earner couples and an increased incidence of divorce, tend to
increase the benefits of groups targeted by the change, but produce
mixed results for others. A number of pension modifications proposed in
the last several years take into account changes in the labor force and
the changing norms of employer-provided retirement plans; while these
reforms are gender-neutral, they may provide important new
opportunities for women to increase their retirement income.
While the costs associated with each of the Social Security program
modifications modeled in this report vary, all but one[Footnote 59]
would have a negative effect on trust fund solvency regardless of the
benchmark used. Because we have analyzed each modification in
isolation, we present the solvency impact for each modification in
isolation; as part of a larger package of reforms, the solvency impact
of each change may vary. For a summary of the solvency impact of each
simulated change under both the "promised benefits" and "funded
benefits" benchmarks, see appendix IV. For more information on both the
"promised benefits" and the "funded benefits" benchmark, see appendix
I.
System Modifications Designed to Increase Social Security Benefits for
Specific Populations Do So, but Sometimes Only Marginally:
Using the Policy Simulation Group's GEMINI and SSASIM models,[Footnote
60] we assessed the effects of certain specific modifications that were
designed to enhance Social Security benefits for specific subgroups of
beneficiaries at age 70.[Footnote 61] We used both a family equivalence
scale and individual level analysis to be able to both compare between
married and unmarried individuals and to assess the impact of
modifications on individuals alone. Each of the changes discussed below
increases benefits for the targeted group, but the size of the increase
projected varies with the number of people affected; generally, the
smaller the population that was targeted by the reform, the larger the
change in benefits and vice versa. While some of the individual
modifications modeled below have no benefit impact outside of the
targeted group, for those that do have broader effects, the impact on
other beneficiaries can vary. The results of our analyses reflect
outcomes for individuals in the simulated populations and do not
attempt to estimate outcomes for an actual population.
Implement Dependent Care Credits:
Dependent care credit proposals seek to compensate those who spend some
years out of the workforce to care for dependents or those with low or
reduced earnings while attending to caregiving responsibilities. Fewer
years in the workforce or reduced earnings during caregiving years tend
to lower a caregiver's average lifetime earnings and, thus, his or her
Social Security benefit levels in retirement. Many advocates have
proposed dependent care proposals that either modify Social Security's
traditional benefit formula, which uses a 35-year span of time to
average lifetime earnings or credit caregivers with additional
earnings. These proposals vary in design and do not necessarily produce
similar results. Either option would require data collection and
computation beyond SSA's current practices, a potential administrative
complication.
* Specified earnings credit: This approach would assign to the
caregiver one half of average earnings for each year in which there was
a child in care and the actual earning was zero or reduced from prior
earnings for a fixed number of years. Those who already earn the credit
amount would not benefit. Research has shown that a caregiver credit
model based on crediting earnings does a better job of targeting lower
earners than excluding care years from earning averages.[Footnote 62]
* Excluding care years from earning averages: This approach 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. 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.
GAO Simulation of a Dependent Care Credit:
We simulated the effect of a dependent care credit similar to one
evaluated by the Urban Institute[Footnote 63] that would credit a
worker's earnings record with one-half of average wages in years in
which there was a child under 5 years of age[Footnote 64] in the
household and the worker's earnings were less than one half of average
wages.[Footnote 65] We evaluated the impact on the Social Security
benefits of two simulated populations--one cohort born in 1950 and
another born in 1985.[Footnote 66]
Using the GEMINI model, we found that this particular 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.
The credit was more beneficial for those born in 1950 than in 1985. As
shown in table 1, its outcome was progressive for those affected by the
change, with women in the lowest earnings quintile showing the highest
proportionate gain in their Social Security benefits. In both cohorts,
never-married women had the largest median change in benefits.[Footnote
67] The effect of this change was also broad; for both birth cohorts,
it affected the largest number of beneficiaries, both men and women, of
any of our simulations.
Table 1: Median Percentage Change in Benefits for Individuals Whose
Benefits Changed after Addition of the Dependent Care Credit--Promised
Benefits Benchmark:
Numbers in percent.
Birth cohort: 1950;
All men: 2.60;
All women: 3.24.
Birth cohort: 1985;
All men: 2.06;
All women: 2.63.
Women by income quintile: Birth cohort: 1950;
Women by income quintile: Lowest quintile: 7.96;
Women by income quintile: Quintile 2: 4.16;
Women by income quintile: Middle quintile: 2.80;
Women by income quintile: Quintile 4: 1.68;
Women by income quintile: Highest profile: 0.92.
Women by income quintile: Birth cohort: 1985;
Women by income quintile: Lowest quintile: 6.88;
Women by income quintile: Quintile 2: 3.50;
Women by income quintile: Middle quintile: 2.12;
Women by income quintile: Quintile 4: 1.14;
Women by income quintile: Highest profile: 0.72.
Women by marital status: Birth cohort: 1950;
Women by marital status: Never married: 7.95;
Women by marital status: Divorced: 5.05;
Women by marital status: Married: 2.64;
Women by marital status: Widowed: 2.87.
Women by marital status: Birth cohort: 1985;
Women by marital status: Never married: 6.69;
Women by marital status: Divorced: 4.18;
Women by marital status: Married: 2.19;
Women by marital status: Widowed: 2.43.
Source: GAO analysis based on the GEMINI model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
Income quintiles are based on the distribution of the present value of
family lifetime earnings for the whole population (male and female).
For percentage of population affected and results using the "Funded
benefits" benchmark, see appendix II.
[End of table]
Table 2: Percentage of Total Simulation Population Whose Benefits
Changed after Addition of the Dependent Care Credit--Promised Benefits
Benchmark:
All men;
Birth Cohort: 1950: 28.43;
Birth Cohort: 1985: 35.06.
All women;
Birth Cohort: 1950: 30.93;
Birth Cohort: 1985: 30.99.
Source: GAO analysis based on the GEMINI model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
[End of table]
Increase Minimum Benefit:
Minimum benefit proposals aim to ensure Social Security benefit
adequacy for low earners. Under current law, Social Security includes a
Special Primary Insurance Amount (also referred to as the Special
Minimum Benefit) intended to reduce poverty among retired lifetime low-
wage workers. The Special Primary Insurance Amount targets retirees
with a low benefit based on a steady, long-time, low wage work record,
rather than on those with a low benefit based on intermittent workforce
attachment;[Footnote 68] the Special Primary Insurance Amount makes
this distinction by basing the calculation on years worked rather than
earnings level. Very few people currently receive benefits based on the
Special Primary Insurance Amount; however, the majority of those who do
are women. Additionally, the benefit provided by the Special Primary
Insurance Amount is less than the official poverty level for aged
persons, and because the benefit is indexed to price inflation rather
than wage growth, it has provided a less generous benefit over time
relative to the traditional wage-indexed Social Security benefit.
Because of this, SSA has projected that the Special Primary Insurance
Amount will phase out as early as 2013. A newly designed minimum
benefit could expand benefits for low earners across all demographic
groups, including women, who are more likely than men to be at the
bottom of the income distribution. Expanded minimum benefits may also
be of renewed importance to benefit adequacy as part of a broad Social
Security reform scenario that reduces benefits for all beneficiaries,
including low earners.
Several Social Security reform proposals include a new minimum benefit
that would guarantee a benefit equal to a set percentage of the poverty
level, dependent on the number of years worked across a lifetime. For
example, Estimated OASDI Financial Effects of the "Bipartisan
Retirement Security Act of 2005"--legislation introduced as H.R. 440 by
Representative Jim Kolbe and Representative Allen Boyd would provide
low earners who had 40 years of minimum wage earnings a benefit equal
to 120 percent of the federal poverty level when fully phased
in.[Footnote 69]
GAO Simulation of an Increased Minimum Benefit:
To simulate the effect of an increased minimum benefit, we modeled a
change to set a minimum benefit of 120 percent 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 changes than women affected by the
change. As expected, the outcome of this change was largely
progressive. 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.[Footnote 70] Moreover,
the median percentage changes in benefits for women in the bottom
quintile was much larger than those for women in the higher quintiles.
(See table 3.)
Table 3: Median Percentage Change in Benefits for Individuals Whose
Benefits Changed after Addition of the Increased Minimum Benefit--
Promised Benefits Benchmark:
Numbers in percent.
Birth Cohort: 1950;
All men: 8.47;
All women: 9.89.
Birth Cohort: 1985;
All men: 6.20;
All women: 6.70.
Women by income quintile: Birth cohort: 1950;
Women by income quintile: Lowest quintile: 22.83;
Women by income quintile: Quintile 2: 9.65;
Women by income quintile: Middle quintile: 5.21;
Women by income quintile: Quintile 4: 3.51;
Women by income quintile: Highest profile: 2.55.
Women by income quintile: Birth cohort: 1985;
Women by income quintile: Lowest quintile: 8.26;
Women by income quintile: Quintile 2: 2.46;
Women by income quintile: Middle quintile: 2.27;
Women by income quintile: Quintile 4: 0.09;
Women by income quintile: Highest profile: 0.
Women by marital status: Birth cohort: 1950;
Women by marital status: Never married: 22.80;
Women by marital status: Divorced: 17.13;
Women by marital status: Married: 7.43;
Women by marital status: Widowed: 8.34.
Women by marital status: Birth cohort: 1985;
Women by marital status: Never married: 19.01;
Women by marital status: Divorced: 14.50;
Women by marital status: Married: 4.55;
Women by marital status: Widowed: 6.48.
Source: GAO analysis based on the GEMINI model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
Income quintiles are based on the distribution of the present value of
family lifetime earnings for the whole population (male and female).
For percentage of population affected and results using the "Funded
benefits" benchmark, see appendix II.
[End of table]
Table 4: Percentage of Total Simulation Population Whose Benefits
Changed after Addition of the Increased Minimum Benefit--Promised
Benefits Benchmark:
Numbers in percent.
All men;
Birth Cohort: 1950: 7.71;
Birth Cohort: 1985: 8.77.
All women;
Birth Cohort: 1950: 1.18;
Birth Cohort: 1985: 1.28.
Source: GAO analysis based on the GEMINI model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
[End of table]
While the share of women affected by the minimum benefit was fairly
similar across marital statuses (never-married, divorced, married and
widowed) in each cohort (for data, see app. II, table 30), never-
married and divorced women had much larger percent changes in median
benefits. For never married women affected by the modification, the
percent change in median benefits was more than double under the
minimum benefit than under any other modification.[Footnote 71]
The impact of the minimum benefit is larger in the 1950 cohort versus
the 1985 cohort because the minimum benefit is linked to the poverty
line, which is indexed to prices, while Social Security initial
benefits are indexed to wages; over time, this results in a lower
minimum benefit relative to Social Security benefits. This effect could
be reduced by indexing the poverty level to wages rather than prices,
as was done in the Kolbe-Boyd proposal.
A minimum benefit following parameters such as we 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; enhanced benefits may
therefore also be provided to individuals who work part-time by
choice.[Footnote 72]
Increase Survivor Benefits:
One way that some proposals address the vulnerability of widows or
widowers to poverty is by raising survivor benefits to a set percentage
of a married couple's prior combined benefit (for example, two-thirds
or three-fourths of the level of benefits received by the couple while
both were living). Under current law, a survivor receives the larger of
his or her own benefit or the benefit of the deceased spouse. Thus,
survivor benefits for many dually entitled women or women receiving
only spousal benefits would replace approximately 67 percent of the
couple's prior total benefit level. Researchers have expressed concern
about whether this decline in total household benefits is too large to
maintain the survivor's previous standard of living. On the other hand,
for survivors of two-earner couples where both spouses received retired
worker benefits on their own record, a widow's benefit under current
law may range between 50 percent and 67 percent of the couple's prior
total benefits upon the death of a spouse, causing an even greater
decline in total household benefit income.
GAO Simulation of an Increased Survivor Benefit:
GAO modeled a survivor benefit that would provide a surviving spouse
with the higher of 75 percent of the couple's previous combined benefit
level, capped at the average benefit level for all new retirees, or the
current law survivor benefit. We did not simulate the effect of the
current provision ensuring surviving spouses a minimum of 82.5 percent
of the deceased worker's PIA; had this been included, results may be
slightly higher. This simulation resulted in increased benefits for
both men and women. (See table 5.) 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; their
median percentage change in benefits was nearly 29 percent 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 percent 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.
Table 5: Median Percentage Change in Benefits for Individuals Whose
Benefits Changed after Addition of Increased Survivor Benefits--
Promised Benefits Benchmark:
Numbers in percent.
Birth cohort: 1950;
All men: 28.78;
All women: 15.71.
Birth cohort: 1985;
All men: 28.98;
All women: 18.36.
Women by income quintile: Birth cohort: 1950;
Women by income quintile: Lowest quintile: 14.81;
Women by income quintile: Quintile 2: 16.28;
Women by income quintile: Middle quintile: 15.77;
Women by income quintile: Quintile 4: 13.69;
Women by income quintile: Highest profile: 24.44.
Women by income quintile: Birth cohort: 1985;
Women by income quintile: Lowest quintile: 19.39;
Women by income quintile: Quintile 2: 18.36;
Women by income quintile: Middle quintile: 16.00;
Women by income quintile: Quintile 4: 16.00;
Women by income quintile: Highest profile: 8.67.
Women by marital status: Birth cohort: 1950;
Women by marital status: Never married: 0;
Women by marital status: Divorced: 16.67;
Women by marital status: Married: 0;
Women by marital status: Widowed: 15.58.
Women by marital status: Birth cohort: 1985;
Women by marital status: Never married: 0;
Women by marital status: Divorced: 18.42;
Women by marital status: Married: 0;
Women by marital status: Widowed: 18.35.
Source: GAO analysis based on the GEMINI model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
Income quintiles are based on the distribution of the present value of
family lifetime earnings for the whole population (male and female).
For percentage of population affected and results using the "Funded
benefits" benchmark, see appendix II.
[End of table]
Table 6: Percentage of Total Simulation Population Whose Benefits
Changed after Addition of Increased Survivor Benefits--Promised
Benefits Benchmark:
All men; B
Birth Cohort: 1950: 0.78;
Birth Cohort: 1985: 0.46.
All women;
Birth Cohort: 1950: 2.11;
Birth Cohort: 1985: 1.13.
Source: GAO analysis based on the GEMINI model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
[End of table]
In both the 1985 and 1950 cohorts, the increased survivor benefit
modification increased the number of women who never fell below the
microsimulation model's low benefit threshold by about 6 percentage
points versus current law. For those women affected by the benefit in
our simulation, the median percentage change in benefits was about 16
percent in the 1950 cohort and about 18 percent in the 1985
cohort.[Footnote 73] As expected, for both cohorts, the majority of
women with benefit changes resulting from this change are widows and
divorced women. Additionally, in terms of number of people affected,
the impacts of this change were concentrated primarily in the bottom
two income quintiles.[Footnote 74]
By capping this program modification at the level of average benefits,
this modification targets the increased survivor's benefit to lower-
earning widows and widowers. Although exempting wealthier beneficiaries
from this benefit enhancement creates fiscal savings, it may limit many
survivors from two-earner couples from benefiting from the change.
Reduce Spousal Benefits and Increase Survivor Benefits:
An increase in survivor benefits is sometimes paired with a decrease in
spousal benefits, from one-half the retired worker's benefit to one-
third. This pairing provides nearly the same average percentage change
in benefits to widows as the modification above, but contains costs by
reducing the spousal benefit while the worker is still living.
GAO Simulation of a Reduction in Spousal Benefits with Increased
Survivor Benefits:
Our simulation of this modification resulted in nearly the same benefit
changes for widows as the "Increase survivor benefits" projection
described above, while the benefits of affected married women and
divorced women--recipients of spousal benefits--had a generally
negative change. When all women affected by this modification are
sorted into quintiles by lifetime household income, the median
percentage change in benefit levels is similar across quintiles, and is
in all cases negative. (See table 7.) Despite this, the low benefit
avoidance rates were quite similar to those produced by the survivor
benefit increase modification for all cohorts, indicating that both
modifications have nearly the same positive impact on our proxy for
poverty avoidance (see app. III).
Table 7: Median Percentage Change in Benefits for Individuals Whose
Benefits Changed after Addition of Decreased Spousal Benefits Paired
with Increased Survivor Benefits--Promised Benefits Benchmark:
Numbers in percent.
Birth cohort: 1950;
All men: -2.81;
All women: -2.66.
Birth cohort: 1985;
All men: -9.14;
All women: -8.78.
Women by income quintile: Birth cohort: 1950;
Women by income quintile: Lowest quintile: -2.55;
Women by income quintile: Quintile 2: -2.55;
Women by income quintile: Middle quintile: -2.66;
Women by income quintile: Quintile 4: -2.67;
Women by income quintile: Highest profile: -2.67.
Women by income quintile: Birth cohort: 1985;
Women by income quintile: Lowest quintile: -9.82;
Women by income quintile: Quintile 2: -8.06;
Women by income quintile: Middle quintile: -8.21;
Women by income quintile: Quintile 4: -8.45;
Women by income quintile: Highest profile: -9.27.
Women by marital status: Birth cohort: 1950;
Women by marital status: Never married: 0;
Women by marital status: Divorced: -8.00;
Women by marital status: Married: -2.67;
Women by marital status: Widowed: 15.58.
Women by marital status: Birth cohort: 1985;
Women by marital status: Never married: 0;
Women by marital status: Divorced: -24.11;
Women by marital status: Married: -9.01;
Women by marital status: Widowed: 18.91.
Source: GAO analysis based on the GEMINI model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
Income quintiles are based on the distribution of the present value of
family lifetime earnings for the whole population (male and female).
For percentage of population affected and results using the "Funded
benefits" benchmark, see appendix II.
[End of table]
Table 8: Percentage of Total Simulation Population Whose Benefits
Changed after Addition of Decreased Spousal Benefits Paired with
Increased Survivor Benefits--Promised Benefits Benchmark:
All men;
Birth Cohort: 1950: 11.45;
Birth Cohort: 1985: 11.58.
All women;
Birth Cohort: 1950: 11.78;
Birth Cohort: 1985: 11.31.
Source: GAO analysis based on the GEMINI model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
[End of table]
This proposal would both smooth household benefit levels before and
after widowhood and provide savings to the Social Security system to
offset costs of the increased survivor benefit.[Footnote 75]
Reduce Duration of Marriage Requirement for Divorced Spouse Benefit
Eligibility:
Proposals to shorten the current requirement for 10-year marriage
duration to be eligible for divorced spouse and survivor benefits would
expand eligibility for benefits to divorced spouses from marriages that
do not meet the 10-year milestone.[Footnote 76] Timing of divorce can
have a large impact on retirement benefits, as an individual divorced
one day before the 10 year anniversary would not be eligible for
benefits, while another individual who waited one more day would be
eligible for a full spousal or survivor benefit. Reducing the 10-year
marriage requirement would make more divorced individuals eligible for
divorced spouse and survivor benefits but would also increase the
probability that an individual with several former spouses could have
several spouses receive benefits on one worker's earnings record.
GAO Simulation of a Reduced Marriage Requirement:
GAO simulated a modification that would reduce the duration of marriage
requirement for receiving divorced spouse benefits from 10 to 7
years.[Footnote 77] 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 percent and 45 percent
respectively (see table 9), the largest median change in benefits for
women among all reforms modeled. The scope of impact, however, was
extremely small: In both cohorts, those affected made up less than 1
percent of the model sample.
The changes in this simulation also resulted in a handful of newly
eligible beneficiaries: In the 1950 cohort, three individuals who were
not previously eligible for Social Security benefits became eligible
under the reform scenario, and in the 1985 cohort, 43 individuals
became eligible. Among the seven simulations that we ran, this was the
only one that resulted in new beneficiaries. This is because
individuals who were not eligible on their record became eligible as
spouses or survivors under the shorter duration of marriage
requirement. These newly eligible beneficiaries are not included in the
median percent change measures.
Table 9: Median Percentage Change in Benefits for Individuals Whose
Benefits Changed after Reduction in Marriage Requirement from 10 to 7
Years--Promised Benefits Benchmark:
Birth cohort: 1950;
All men: 0.85;
All women: 65.32.
Birth cohort: 1985;
All men: 37.22;
All women: 45.05.
Women by income quintile: Birth cohort: 1950;
Women by income quintile: Lowest quintile: 85.18;
Women by income quintile: Quintile 2: 54.66;
Women by income quintile: Middle quintile: 162.36;
Women by income quintile: Quintile 4: 33.33;
Women by income quintile: Highest profile: 0.
Women by income quintile: Birth cohort: 1985;
Women by income quintile: Lowest quintile: 53.99;
Women by income quintile: Quintile 2: 34.41;
Women by income quintile: Middle quintile: 33.33;
Women by income quintile: Quintile 4: 36.31;
Women by income quintile: Highest profile: 25.14.
Women by marital status: Birth cohort: 1950;
Women by marital status: Never married: 0;
Women by marital status: Divorced: 65.32;
Women by marital status: Married: 0;
Women by marital status: Widowed: 0.
Women by marital status: Birth cohort: 1985;
Women by marital status: Never married: 0;
Women by marital status: Divorced: 45.05;
Women by marital status: Married: 0;
Women by marital status: Widowed: 0.
Source: GAO analysis based on the GEMINI model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
Income quintiles are based on the distribution of the present value of
family lifetime earnings for the whole population (male and female).
For percentage of population affected and results using the "Funded
benefits" benchmark, see appendix II.
[End of table]
Table 10: Percentage of Total Simulation Population Whose Benefits
Changed after Reduction in Marriage Requirement from 10 to 7 Years--
Promised Benefits Benchmark:
All men;
Birth Cohort: 1950: 0;
Birth Cohort: 1985: 0.03.
All women;
Birth Cohort: 1950: 0.04;
Birth Cohort: 1985: 0.51.
Source: GAO analysis based on the GEMINI model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
[End of table]
Pension Modifications That Address the Changing Pension Landscape and
Changing Workforce Patterns May Serve Women Better than Traditional
Pension Models:
In addition to the Social Security proposal elements above, we
simulated two pension modifications that address challenges related to
the shift to DC plans and changing workforce patterns.[Footnote 78]
Both modifications modeled by GAO generally resulted in higher pension
benefits, and address issues that may be of particular concern to
women. In particular, in DC plans,[Footnote 79] contributing early and
maintaining an account over time has a significant positive impact on
the balance of that account and the resulting retirement benefit.
Decreasing vesting requirements would allow workers who change jobs
more frequently to attain increased benefits from pension plans.
Automatically rolling over accounts at a job's end increases the
probability that accrued retirement balances will in fact be saved for
retirement. The GEMINI/PENSIM models do not account for behavioral
responses to program changes; therefore, data do not take into account
possible employer or employee responses to the program modifications
below.
Lowering Vesting Requirements:
Under current law, eligible employees must be allowed to participate in
a plan as of age 21 and after completing 1 year of service, subject to
certain exceptions. An employee's own contributions to their pension
plan are nonforfeitable, as are employer contributions once an
employee's benefits have vested. ERISA, as amended, requires cliff
vesting[Footnote 80] in DBs within 5 years and full vesting under a
graduated vesting[Footnote 81] schedule within 7 years. cash balance
plans ("hybrid" plans) generally will require vesting within 3 years.
Beginning in 2008 employer contributions to DC plans[Footnote 82] must
vest in either a 3-year cliff or 6-year phased schedule (includes
service prior to 2007).[Footnote 83]
GAO Simulation of Lowered Vesting Requirements for Employer-Provided
Pensions:
Using the PENSIM microsimulation model, we projected the impact of a
reduced vesting schedule on retirement benefits. For DB plans we
specified 2-year cliff vesting, and for DC plans we 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 percent. Similarly, men's median
percentage change in benefits for those affected was of 5.74
percent.[Footnote 84] (See table 11.) 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. This suggests that increases in pension
benefits gained as a result of this change represent a larger portion
of total pension accumulation for less affluent women. Similarly, 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.
Table 11: Median Percentage Change in Pension Benefits for Individuals
Born in 1985 Whose Benefits Changed After Lowered Vesting Schedules:
All men: 5.74;
All women: 6.29;
Women by income quintile: Lowest quintile: 16.37;
Women by income quintile: Quintile 2: 8.90;
Women by income quintile: Middle quintile: 6.18;
Women by income quintile: Quintile 4: 5.11;
Women by income quintile: Highest quintile: 3.51.
Women by marital status: Never married: 11.14;
Women by marital status: Divorced: 11.30;
Women by marital status: Married: 5.35;
Women by marital status: Widowed: 6.81.
Source: GAO analysis based on the PENSIM model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
Income quintiles are based on the distribution of the present value of
family lifetime earnings for the whole population (male and female).
For percentage of population affected and results using the "Funded
benefits" benchmark, see appendix II.
[End of table]
Table 12: Percentage of Total Simulation Population Whose Benefits
Changed after Implementation of Lowered Vesting Schedules:
All men;
Birth Cohort: 1985: 14.34.
All women;
Birth Cohort: 1985: 12.62.
Source: GAO analysis based on the GEMINI model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
[End of table]
Automatic Rollover upon Leaving Employment Prior to Retirement Age:
"Automatic rollover" proposals would maintain the level of accrued
retirement benefits in DC plans when an individual switches jobs before
retirement by automatically contributing retirement balances to a
qualified retirement savings account. According to research conducted
by the Employee Benefit Research Institute in 2003, under 50 percent of
recipients of lump sum distributions between the ages of 30 and 50
reported using the entire portion for reinvestment into a qualified
account.[Footnote 85] For those aged 21 to 30, the percentage using the
entire distribution for tax-qualified financial savings drops to under
35. This modification would provide greater retirement income for men
and women. However, some research shows that women roll over a lower
percentage of their accrued balances than men do;, because of this,
requiring automatic rollover may have a larger effect on women overall.
GAO Simulation of 100 Percent Automatic Rollover for Employer-Provided
Pensions:
GAO used the GEMINI microsimulation model to determine what the impact
could be on retirement benefit levels if 100 percent 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 percent and 7.63 percent, respectively. (See table 13.) 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 or who were
divorced had the largest percentage median increases in benefits.
Additionally, while the number of women affected by this change again
was fairly evenly distributed across the top four income quintiles with
fewer in the lowest, those in the lowest two income quintiles had
substantially larger median percentage changes in benefits than those
in the highest two quintiles.
Table 13: Median Percentage Change in Pension Benefits for Individuals
Born in 1985 Whose Benefits Changed after Implementation of 100 Percent
Automatic Rollover:
Numbers in percent.
All men: 7.30;
All women: 7.63.
Women by income quintile: Lowest quintile: 16.94;
Women by income quintile: Quintile 2: 11.85;
Women by income quintile: Middle quintile: 8.50;
Women by income quintile: Quintile 4: 5.97;
Women by income quintile: Highest quintile: 3.62.
Women by marital status: Never married: 15.04;
Women by marital status: Divorced: 11.85:
Women by marital status: Married: 12.09;
Women by marital status: Widowed: 6.74;
Source: GAO analysis based on the PENSIM model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
Income quintiles are based on the distribution of the present value of
family lifetime earnings for the whole population (male and female).
For percentage of population affected and results using the "Funded
benefits" benchmark, see appendix II.
[End of table]
Table 14: Percentage of Total Simulation Population Whose Benefits
Changed after Implementation of 100 Percent Automatic Rollover:
Numbers in percent.
All men;
Birth Cohort: 1985: 12.26.
All women;
Birth Cohort: 1985: 11.21.
Source: GAO analysis based on the GEMINI model.
Note: Simulations calculated benefits for individuals at age 70 and
were based on benefits adjusted for household size (for more
information, see discussion of Family Equivalence Scale in appendix I).
[End of table]
Concluding Observations:
Despite the increases in women's labor force participation over the
past 55 years, certain groups of women will continue to be vulnerable
to economic insecurity in retirement. While women are working more than
in the past, they remain the primary source of family caregiving and
are more likely than men either to reduce their workforce participation
or never to enter the paid workforce. Consequently, despite elements of
the Social Security and employer-sponsored pension systems that provide
retirement income for low-or non-earning spouses, the remaining gaps
between women's and men's labor force participation, earnings, and
pension participation will continue to leave many women with fewer
financial resources in retirement than men. In addition to the choices
many women make to stay out of the workforce or to reduce the amount of
their work, certain life events (such as divorce and widowhood) are
likely to exacerbate this disparity. Ultimately, women's roles in the
workplace and within a family may hinder them from building sufficient
retirement resources, leaving them at greater risk of poverty in old
age.
Other trends can exacerbate the vulnerability of women in retirement.
Many proposed reforms for Social Security and employer-provided
pensions have focused on long-term solvency and financing issues.
Research has shown that many of these types of reforms have the
potential to reduce retirement income from levels scheduled in current
law for a large number of beneficiaries. This is of particular concern
for women because of their reliance on Social Security as a main source
of retirement income. Changes in the structure of employer-sponsored
pensions, which can have some benefits for women, may also have some
negative consequences. Although the shift to DC type plans can have a
positive impact on people who change jobs frequently or work
intermittently, such plans can transfer more of the responsibility to
make prudent investment decisions and to manage longevity risk to
individuals. While this is true for both men and women, it is of
particular concern for women because of their greater longevity.
Moreover, the original design of the Social Security system was based
on a particular household structure--single earner families--and that
structure is no longer the norm in America. If policy makers wish to
design a system that adequately and equitably compensates all retirees,
then it will be necessary to design a system that reflects the
diversity of employment patterns and family structure within the
population it serves. In fact, several past reform proposals included
modernization elements that would target benefit enhancements to
various subgroups.
In contemplating modifications to Social Security or employer-provided
pensions, it is helpful to understand all possible effects, including
the impact on Social Security solvency or costs to employers. Each of
the Social Security changes that we modeled would have small, but
negative, effects on program solvency. Small effects such as these,
when included in a larger package of reforms, could be overwhelmed by
the effects of other changes. Nevertheless, the trade-offs between
enhanced benefits and costs are always important to consider. It is
also helpful to understand how changes may affect different types of
individuals with different work and earnings histories--for example,
women who never enter the workforce or choose to reduce their work,
possibly to care for children or other family members. Changes to
benefit structures may also have different effects on individuals
within different family structures, such as single-earner married
couples, dual-earner households, or unmarried heads of household.
Recognizing these differences is important not only in terms of
improving adequacy and equity in the benefit structure, but also in
understanding how different benefit structures might affect the choices
individuals make regarding their own workforce attachment. With such
knowledge, policy makers have the potential to mitigate both existing
disparities in retirement income as well as the differential effects of
reforms.
Agency Comments:
We provided a draft of this report to the departments of Labor and the
Treasury, the Internal Revenue Service, and the Social Security
Administration. The departments of Labor and the Treasury and the
Social Security Administration provided technical comments, which we
incorporated where appropriate.
We are sending copies of this report to the Secretary of Labor, the
Commissioner of Internal Revenue, the Commissioner of Social Security,
the Secretary of the Treasury, and appropriate congressional
committees, and other interested parties. We will also make copies
available to others upon request. In addition, the report will be
available at no charge on GAO's Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-7215 or at bovbjergb@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix V.
Signed by:
Barbara D. Bovbjerg:
Director:
Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Methodology:
To identify the effects of individual reform elements on Social
Security and pension benefit levels for women, we used the Policy
Simulation Group's (PSG) microsimulation models to simulate Social
Security benefits and pension income.
For our simulations, we used PSG's Social Security and Accounts
Simulator (SSASIM), Genuine Microsimulation of Social Security Accounts
(GEMINI), and Pension Simulator (PENSIM) simulation models. GEMINI
simulates Social Security benefits and taxes for large representative
samples of people born in the same year. GEMINI simulates all types of
Social Security benefits including retired workers', spouses',
survivors', and disability benefits. It can be used to model a variety
of changes to Social Security. GEMINI uses inputs from SSASIM, which
has been used in numerous GAO reports, and PENSIM, which was developed
for the Department of Labor. GEMINI relies on SSASIM for economic and
demographic projections and relies on PENSIM for simulated life
histories of large representative samples of people born in the same
year and their spouses.[Footnote 86] Life histories include educational
attainment, labor force participation, earnings, job mobility,
marriage, disability, childbirth, retirement, and death. Life histories
are validated against data from the Survey of Income and Program
Participation, the Current Population Survey, Modeling Income in the
Near Term (MINT3),[Footnote 87] and the Panel Study of Income Dynamics.
Additionally, any projected statistics (such as life expectancy,
employment patterns, and marital status at age 60) are, where possible,
consistent with intermediate cost projections from the Social Security
Administration's Office of the Chief Actuary (OCACT). At their best,
such models can provide only very rough estimates of future incomes.
However, these estimates may be useful for comparing future incomes
across alternative policy scenarios and over time.
GEMINI can be operated as a free-standing model or it can operate as a
SSASIM add-on. When operating as an add-on, GEMINI is started
automatically by SSASIM for one of two purposes. GEMINI can enable the
SSASIM macro model to operate in the Overlapping Cohorts (OLC) mode or
it can enable the SSASIM micro model to operate in the Representative
Cohort Sample (RCS) mode. The SSASIM OLC mode requests GEMINI to
produce samples for each cohort born after 1934 in order to build up
aggregate payroll tax revenues and (Old-Age, Survivors, and Disability
Insurance) OASDI benefit expenditures for each calendar year, which are
used by SSASIM to calculate standard trust fund financial statistics.
In either mode, GEMINI operates with the same logic, but typically with
smaller cohort sample sizes in OLC mode than in the RCS or stand-alone-
model mode.
Using the GEMINI model, we estimated Social Security benefits at age 70
for approximately 2 percent of individuals born in each of two
illustrative birth cohorts, 1950 (resulting in a sample of 63,813
individuals) and 1985 (resulting in a sample of 78,857 individuals). We
also used the PENSIM model to estimate pension income for those born in
1985.[Footnote 88] We simulated Social Security benefits for two
cohorts in order to identify differences in the effects of
modifications that could be due to variations in labor force
participation across generations. We also used the microsimulation
models to simulate Social Security benefits, pension income, and the
earnings of spouses not yet retired, in order to explore the
relationships between benefit levels and workforce attachment and
marital status. For this analysis we simulated benefit levels at ages
67 and 85 for the 1985 birth cohort. These models do not include
measures of personal savings, earnings in retirement, health benefits,
or income from other income support programs.
Additionally, we evaluated the effect of Social Security modifications
on a "low benefit avoidance rate," a measure produced by the model that
proxies for poverty avoidance. However, it does not include pension
income or savings, and so cannot be called a poverty avoidance measure.
The low benefit avoidance rate is expressed as the percentage of
retirement years in which an individual's Social Security benefits
(plus any earnings) are above a low-benefit threshold in the GEMINI
model (the thresholds are $9,669 for individuals and $12,186 for
couples, in 2007 dollars). Both income and the threshold are based on
individual data when unmarried and on couple data when married.
Benefits and taxes were simulated under our tax increase only (promised
benefits) and proportional benefit reduction (funded benefits)
benchmarks (described below) and certain specific individual
programmatic changes. These simulations are based on the Social
Security Trustees' 2007 intermediate economic and actuarial
assumptions. While our simulations provide projections of future
retirement income, there is a considerable amount of uncertainty
involved with these estimates. Since these estimates could change
significantly, depending on assumptions used and behavior responses,
they should not be considered predictions. Furthermore, because
simulations are sensitive to economic and demographic assumptions, it
is generally more appropriate to compare benefits across the scenarios
than to focus on the actual estimates themselves. Therefore, to avoid
inappropriate comparisons, we evaluated the effects of modifications
based on the changes in benefit levels rather than comparing actual
benefit levels.
In general, GAO has suggested that policy makers should consider three
basic criteria when evaluating reform proposals[Footnote 89]
* the extent to which the proposal achieves sustainable solvency and
how the proposal would affect the economy and the federal budget;
* the balance struck between the goals of individual equity[Footnote
90] (rates of return on individual contributions) and income
adequacy[Footnote 91] (level and certainty of monthly benefits); and:
* how readily such changes could be implemented, administered, and
explained to the public.
Moreover, changes to the system should be evaluated as packages that
strike a balance among the individual elements of the proposal and the
interactions among these elements. The overall evaluation of any
particular reform proposal depends on the weight individual policy
makers place on each of the above criteria.
However, for the purposes of this study we evaluated only specific
individual modifications. We looked at certain specific changes in
order to focus on those that account for more recent shifts in family
structure and labor force composition. In particular, we wanted to
identify the direction of the impact of modifications that might be
used to mitigate the effects of broad reform packages likely to reduce
benefits. Nevertheless, we recognize that there could be important
interaction effects with any set of reforms and maintain the importance
of considering all possible effects of any reform package as a whole.
The solvency impact of any single programmatic change may be marginal
and, as part of a package, could be overwhelmed by other changes.
Nevertheless, in appendix IV, we have provided the impact of each
change on the Social Security Trust Fund balance, after achieving 75-
year solvency with the benchmark scenarios. Additionally, because we
simulated programmatic changes in isolation we could not calculate
traditional equity measures, which relate benefits received to taxes
paid. Because we simulated programmatic changes in isolation on top of
solvent benchmark scenarios, the results did not achieve long-term
solvency. We did not speculate on how the changes would be paid for in
the context of overall reform. Without information on total
contributions or benefits under each simulation, traditional equity
measures would not be meaningful. Finally, given the limited scope of
the changes we simulated, we did not address issues of implementation,
administration, or public comprehension.
Assumptions and Limitations:
Simulating retirement income almost 50 years into the future requires
many assumptions and simplifications, and consequently, our simulations
have a number of limitations. A primary limitation of our analysis is
that it does not include important components of retirement income such
as personal savings, earnings in retirement, health benefits, and other
public assistance programs such as Supplemental Security Income (SSI).
To facilitate our modeling analysis, we made a variety of assumptions
regarding economic and demographic trends. In choosing our assumptions,
we focused our analysis to illustrate relevant points about
distributional effects and hold equal as much as possible any variables
that were either not relevant to or would unduly complicate that focus.
As a result of these assumptions, as well as issues inherent in any
modeling effort, our analysis has some key limitations.
2007 Social Security Trustees' Assumptions:
The simulations are based on economic and demographic assumptions from
the 2007 Social Security Trustees' report.[Footnote 92] We used the
Trustees' intermediate assumptions for inflation, real wage growth,
mortality decline, immigration, labor force participation, and interest
rates.
Family Equivalence Scale:
For some of our analyses, we used a measure of income adjusted to
account for household size and economies of scale. We did this to
facilitate comparisons between nonmarried persons and married persons
whose household income includes income from both spouses that can vary
significantly between them. For instance, although a married couple may
need approximately twice as much for food and clothing as a single
person, other needs, such as housing and transportation, are not
additive in the same way. However, the effect of using data adjusted
for household size on a reform targeted at married couples, such as a
change in spousal benefits, is that the change in benefits resulting
from the program modification is shared by both the husband and the
wife. Thus, population data based on the adjusted measure describe the
number of people whose household had a benefit change resulting from
the modification. For example, in the "Decreased Spousal Benefit and
Increased Survivor Benefit" modification, the family equivalence data
indicate that a nearly equal percent of men and women are affected by
the modification because the effect of the benefit change is shared by
both spouses. Therefore, in order to identify just the percent of men
and women who had changes to their own benefit as a result of the
program change, percentages are also calculated based on benefits not
adjusted for household size.
The adjustment is made by dividing household benefit levels by a
"family equivalence scale."[Footnote 93] This equivalence scale
reflects both differences in consumption by adults and children under
18 and the economies of scale that benefit families. The family
equivalence scale in the GEMINI model (shown below) and its default
parameters are based on the recommendations of the National Academy of
Sciences' Panel on Poverty and Family Assistance.
Family equivalence scale = (A + P*k)F:
where A is the number of adults in the family,
k is the number of children, each of whom is treated as a proportion P
of an adult, and:
f is the scale economy factor.
Thus, the formula calculates the number of adult equivalents (A + P*k)
and raises the result to a power f that reflects economies of scale for
families. We used the default parameters in the model, so that both P
and f are 0.70.
Description of Simulated Social Security Modifications:
Dependent Care Credit--Analyzing Impact of Inserting a "Credit"
To simulate a dependent care credit we provided a "credit" in the OASDI
work record that would top off a year's earnings to the level of half
of average wages. In a given year, the OASDI work records of
individuals with a child 5 years of age or under and who had earnings
less than one-half of average wages were credited with one half of
average wages (as measured by the Average Wage Index used by the Social
Security Administration). A lifetime maximum of five credits was
allowed. If both parents met these criteria in any given year, only the
lower-earning parent received the credit; if both parent's earnings
were identical in any given year, the credit was split evenly. Credits
were not counted toward benefit eligibility. In our simulation the
reform went into effect in 2010.
This change as specified has not been scored publicly by OCACT. Using
the OLC mode of SSASIM that mimics the intermediate assumptions of the
2007 Trustees' report, we estimated this modification as increasing the
size of the long-range actuarial deficit by 0.19 percent under the
"promised benefits" benchmark and by 0.17 under the "funded benefits"
benchmark.
Decrease Spousal Benefit/Increase Survivor Benefit:
To simulate the effects of a decrease in spousal benefits paired with
an increase in survivor benefits, we reduced spousal benefits from one-
half to one-third of the retired worker's benefit. We also increased
the survivor benefit to 75 percent of the couple's previous combined
benefit level, if higher than the survivor benefit available under
current law. The benefit of this reform is capped at the average PIA
for all new retirees. Our simulation of the reform went into effect in
2010.
These changes as specified have not been scored publicly by
OCACT.[Footnote 94] Using the OLC mode of SSASIM that mimics the
intermediate assumptions of the 2007 Trustees' report, we estimated
this modification as decreasing the size of the long-range actuarial
deficit by 0.02 percent under the "promised benefits" benchmark and
increasing the size of the long range actuarial deficit by 0.06 under
the "funded benefits" benchmark.
Increased Survivor Benefit Only:
We also simulated the effects of an increase in survivor benefits
independently. To do this, as above, we increased the survivor benefit
to 75 percent of the couple's previous combined benefit level, if
higher than the survivor benefit available under current law. The
benefit of this reform is capped at the average PIA for all new
retirees. Our simulation of the reform went into effect in 2010.
This change is similar to one scored by OCACT as part of the OASDI
Financial Effects of the Social Security Guarantee Plus Act of 2005
(May 12, 2005), which estimated a 0.08 percent increase to the long-
range actuarial deficit, and Estimated OASDI Financial Effects of the
Bipartisan Retirement Security Act of 2005 (November 4, 2005), which
also estimated a 0.08 percent increase to the long-range actuarial.
Using the OLC mode of SSASIM that mimics the intermediate assumptions
of the 2007 Trustees' report, we estimated this modification as
increasing the size of the long-range actuarial deficit by 0.07 percent
under the "promised benefits" benchmark and by 0.14 percent under the
"funded benefits" benchmark.
Reduce 10-Year Marriage Requirement:
To simulate the effects of a reduced marriage requirement to qualify
for divorced spouse benefits, we reduced duration of marriage
requirements from 10 to 7 years. In our simulation, this reform took
effect in 2010.
This change as specified has not been scored publicly by OCACT. Using
the OLC mode of SSASIM that mimics the intermediate assumptions of the
2007 Trustees' report, we estimated this change as increasing the size
of the long-range actuarial deficit by 0.02 percent under the "promised
benefits" benchmark and increasing the size of the long-range actuarial
deficit by 0.06 under the "funded benefits" benchmark.
Increase/Strengthen Minimum Benefit:
To simulate an increased minimum benefit, we provided a partial benefit
enhancement for workers with more than 80 quarters of coverage and
provide a full benefit enhancement to workers with 120 quarters of
coverage. It would equal 120 percent of the aged poverty threshold for
workers with 120 quarters of coverage and be linearly prorated to zero
for workers with 80 quarters of coverage. These provisions would also
apply in determining the PIA levels used for calculating auxiliary
benefits and DI benefits. The first year of full implementation is
2010.
This modification as specified has not been scored publicly by OCACT.
Using the OLC mode of SSASIM that mimics the intermediate assumptions
of the 2007 Trustees' report, we estimated this change as increasing
the size of the long-range actuarial deficit by 0.05 percent under the
"promised benefits" benchmark and increasing the size of the long range
actuarial deficit by 0.13 percent under the "funded benefits" benchmark
as well.
Description of Simulated Pension Modifications:
Decrease Vesting Requirements:
In our modeling of this modification, we reduced maximum allowable
vesting periods to 2 years for all pension programs with cliff vesting
and 3 years for all pension programs with graduated vesting. If plans
within the model already used shorter vesting schedules, those vesting
schedules remained unchanged. In our simulation, this change took
effect in 2010.
Automatic Rollover:
In order to consider the potential upper bound of impact for a
modification that would ensure full rollover of retirement assets at
preretirement job terminations, we modeled a full rollover of
retirement balances into qualified accounts. In our simulation, this
change took effect in 2010.
Data Reliability:
To assess the reliability of simulated data from GEMINI, we reviewed
PSG's published validation checks, examined the data for reasonableness
and consistency, and compared our solvency estimates, where applicable,
with published results from the actuaries at the Social Security
Administration.
PSG has published a number of validation checks of its simulated life
histories. For example, simulated life expectancy is compared with
projections from the Social Security Trustees; simulated benefits at
age 62 are compared with administrative data from SSA; and simulated
educational attainment, labor force participation rates, and job tenure
are compared with values from the Current Population Survey. We found
that simulated statistics for the life histories were reasonably close
to the validation targets.
Benchmark Policy Scenarios:
According to current projections of the Social Security Trustees for
the next 75 years, revenues will not be adequate to pay full benefits
as defined by the current benefit formula. Therefore, estimating future
Social Security benefits should reflect that actuarial deficit and
account for the fact that some combination of benefit reductions and
revenue increases will be necessary to restore long-term solvency.
To illustrate a full range of possible outcomes, we developed
hypothetical benchmark policy scenarios that would achieve 75-year
solvency either by only increasing payroll taxes or by only reducing
benefits.[Footnote 95] In developing these benchmarks, we identified
criteria to use to guide their design and selection. Our tax-increase-
only benchmark simulates "promised benefits," or those benefits
promised by the current benefit formula, while our benefit-reduction-
only benchmark simulates "funded benefits," or those benefits for which
currently scheduled revenues are projected to be sufficient. Under the
latter policy scenario, the benefit reductions would be phased in
between 2010 and 2040 to strike a balance between the size of the
incremental reductions each year and the size of the ultimate
reduction.
Social Security Administration (SSA) actuaries scored our original 2001
benchmark policies and determined the parameters for each that would
achieve 75-year solvency.[Footnote 96] Table 8 summarizes our benchmark
policy scenarios. For our benefit reduction scenario, the actuaries
determined these parameters assuming that disabled and survivor
benefits would be reduced on the same basis as retired worker and
dependent benefits. If disabled and survivor benefits were not reduced
at all, reductions in other benefits would be greater than shown in
this analysis.
Table 15: Summary of Benchmark Policy Scenarios:
Benchmark policy scenario: Tax increase only (promised benefits);
Description: Increases payroll taxes in 2008 by amount necessary to
achieve 75-year solvency (0.98 percent of payroll each for employees
and employers);
Phase-in period: Immediate;
Ultimate new benefit reductions[A] (percent): 0.
Benchmark policy scenario: Proportional benefit reduction (funded
benefits);
Description: Reduces benefit formula factors proportionally across all
earnings levels;
Phase-in period: 2013-2043;
Ultimate new benefit reductions[A] (percent): 27.
Source: GAO.
[A] These benefit reduction amounts do not reflect the implicit
reductions resulting from the gradual increase in the full retirement
age that has already been enacted.
[End of table]
Criteria:
According to our analysis, appropriate benchmark policies should
ideally be evaluated against the following criteria:
1. Distributional neutrality: The benchmark should reflect the current
system as closely as possible while still restoring solvency. In
particular, it should try to reflect the goals and effects of the
current system with respect to redistribution of income. However, there
are many possible ways to interpret what this means, such as:
a. producing a distribution of benefit levels with a shape similar to
the distribution under the current benefit formula (as measured by
coefficients of variation, skewness, kurtosis, and so forth);
b. maintaining a proportional level of income transfers in dollars;
c. maintaining proportional replacement rates; and:
d. maintaining proportional rates of return.
2. Demarcating upper and lower bounds: These would be the bounds within
which the effects of alternative proposals would fall. For example, one
benchmark would reflect restoring solvency solely by increasing payroll
taxes and therefore maximizing benefit levels, while another would
solely reduce benefits and therefore minimize payroll tax rates.
3. Ability to model: The benchmark should lend itself to being modeled
within the GEMINI model.
4. Plausibility: The benchmark should serve as a reasonable alternative
within the current debate; otherwise, the benchmark could be perceived
as an invalid basis for comparison.
5. Transparency: The benchmark should be readily explainable to the
reader.
Tax-Increase-Only or "Promised Benefits," Benchmark Policies:
Our tax-increase-only benchmark would raise payroll taxes once and
immediately by the amount of Social Security's actuarial deficit as a
percentage of payroll. It results in the smallest ultimate tax rate of
those we considered and spreads the tax burden most evenly across
generations; this is the primary basis for our selection. The later
that taxes are increased, the higher the ultimate tax rate needed to
achieve solvency, and in turn the higher the tax burden on later
taxpayers and lower on earlier taxpayers. Still, any policy scenario
that achieves 75-year solvency only by increasing revenues would have
the same effect on the adequacy of future benefits in that promised
benefits would not be reduced. Nevertheless, alternative approaches to
increasing revenues could have very different effects on individual
equity.
Benefit-Reduction-Only, or "Funded Benefits," Benchmark Policies:
We developed alternative benefit reduction benchmarks for our analysis.
For ease of modeling, all benefit reduction benchmarks take the form of
reductions in the benefit formula factors; they differ in the relative
size of those reductions across the three factors, which are 90, 32,
and 15 percent under the current formula. Each benchmark has three
dimensions of specification: scope, phase-in period, and the factor
changes themselves. For our analysis, we apply benefit reductions in
our benchmarks very generally to all types of benefits, including
disability and survivors' benefits as well as old-age benefits. Our
objective is to find policies that achieve solvency while reflecting
the distributional effects of the current program as closely as
possible. Therefore, it would not be appropriate to reduce some
benefits and not others. If disabled and survivor benefits were not
reduced at all, reductions in other benefits would be deeper than shown
in this analysis.
Phase-in Period:
We selected a phase-in period that begins with those becoming initially
entitled in 2013 and continues for 30 years. We chose this phase-in
period to achieve a balance between two competing objectives: (1)
minimizing the size of the ultimate benefit reduction and (2)
minimizing the size of each year's incremental reduction to avoid
"notches," or unduly large incremental reductions. Notches create
marked inequities between beneficiaries close in age to each other.
Later birth cohorts are generally agreed to experience lower rates of
return on their contributions already under the current system.
Therefore, minimizing the size of the ultimate benefit reduction would
also minimize further reductions in rates of return for later cohorts.
The smaller each year's reduction, the longer it will take for benefit
reductions to achieve solvency, and in turn the greater the eventual
reductions will have to be. However, the smallest possible ultimate
reduction would be achieved by reducing benefits immediately for all
new retirees by 13 percent; this would create a notch.
In addition, we feel it is appropriate to delay the first year of the
benefit reductions for a few years because those within a few years of
retirement would not have adequate time to adjust their retirement
planning if the reductions applied immediately. The Maintain Tax Rates
(MTR) benchmark in the 1994-1996 Advisory Council report also provided
for a similar delay.[Footnote 97]
Finally, the timing of any policy changes in a benchmark scenario
should be consistent with the proposals against which the benchmark is
compared. The analysis of any proposal assumes that the proposal is
enacted, usually within a few years. Consistency requires that any
benchmark also assumes enactment of the benchmark policy in the same
time frame. Some analysts have suggested using a benchmark scenario in
which Congress does not act at all and the trust funds become
exhausted.[Footnote 98] However, such a benchmark assumes that no
action is taken, while the proposals against which it is compared
assume that action is taken, which is inconsistent. It also seems
unlikely that a policy enacted over the next few years would wait to
reduce benefits until the trust funds are exhausted; such a policy
would result in a sudden large benefit reduction and create substantial
inequities across generations.
Defining the PIA Formula Factor Reductions:
When workers retire, become disabled, or die, Social Security uses
their lifetime earnings records to determine each worker's PIA, on
which the initial benefit and auxiliary benefits are based. The PIA is
the result of two elements--the Average Indexed Monthly Earnings (AIME)
and the benefit formula. The AIME is determined by taking the lifetime
earnings record, indexing it, and taking the average of the highest 35
years of indexed wages.[Footnote 99] To determine the PIA, the AIME is
then applied to a step-like formula, shown here for 2007.
PIA =90%Ÿ (AIME1 $680) + 32%Ÿ (AIME2 > $680 and $4100) + 15%Ÿ (AIME3 >
$4100):
where AIMEi is the applicable portion of AIME.
All of our benefit-reduction benchmarks are variations of changes in
PIA formula factors.
Proportional reduction: Each formula factor is reduced annually by
subtracting a constant proportion of that factor's value under current
law, resulting in a constant percentage reduction of currently promised
benefits for everyone. That is,
FIt+1 = FIt - (FI2008 Ÿ x):
where:
FIt represents the three PIA formula factors in year t and:
x = constant proportional formula factor reduction.
The value of x is calculated to achieve 75-year solvency, given the
chosen phase-in period and scope of reductions.
The formula for this reduction specifies that the proportional
reduction is always taken as a proportion of the current law factors
rather than the factors for each preceding year. This maintains a
constant rate of benefit reduction from year to year. In contrast,
taking the reduction as a proportion of each preceding year's factors
implies a decelerating of the benefit reduction over time because each
preceding year's factors get smaller with each reduction. To achieve
the same level of 75-year solvency, this would require a greater
proportional reduction in earlier years because of the smaller
reductions in later years.
The proportional reduction hits lower earners harder than higher
earners because the constant x percent of the higher formula factors
results in a larger percentage reduction over the lower earnings
segments of the formula. For example, in a year when the cumulative
size of the proportional reduction has reached 10 percent, the 90
percent factor would then have been reduced by 9 percentage points, the
32 percent factor by 3.2 percentage points, and the 15 percent factor
by 1.5 percentage points. As a result, earnings in the first segment of
the benefit formula would be replaced at 9 percentage points less than
the current formula, while earnings in the third segment of the formula
would be replaced at only 1.5 percentage points less than the current
formula.[Footnote 100]
Table 9 summarizes the features of our benchmarks.
Table 16: Summary of Benchmark Policy Scenario Parameters:
Benchmark policy scenario: Tax increase only (promised benefits);
Phase-in period: 2008;
Annual PIA factor reduction (percentage point): 90 percent factor: 0;
Annual PIA factor reduction (percentage point): 32 percent factor: 0;
Annual PIA factor reduction (percentage point): 15 percent factor: 0;
Ultimate PIA factor (2043) (percent): 90 percent factor: 90.00;
Ultimate PIA factor (2043) (percent): 32 percent factor: 32.00;
Ultimate PIA factor (2043) (percent): 15 percent factor: 15.00.
Benchmark policy scenario: Proportional benefit reduction (funded
benefits);
Phase-in period: 2013-2043;
Annual PIA factor reduction (percentage point): 90 percent factor:
0.80;
Annual PIA factor reduction (percentage point): 32 percent factor:
0.28;
Annual PIA factor reduction (percentage point): 15 percent factor:
0.13;
Ultimate PIA factor (2043) (percent): 90 percent factor: 65.28;
Ultimate PIA factor (2043) (percent): 32 percent factor: 23.21;
Ultimate PIA factor (2043) (percent): 15 percent factor: 10.88.
Source: GAO's analysis as scored by SSA actuaries.
Note: Annual PIA factor reductions rounded to the nearest hundredth of
a percent.
[End of table]
[End of section]
Appendix II: Simulation Results for Social Security Modifications:
To account for differences in household size and economies of scale
associated with larger households, we based our analyses on benefit
levels adjusted for household size (see app. I for more information).
However, the effect of using data adjusted for household size on a
reform targeted at married couples, such as a change in spousal
benefits, is that the change in benefits resulting from the program
modification is shared by both the husband and the wife. Thus,
population data based on the adjusted measure describe the number of
people whose household had a benefit change resulting from the
modification. For example, in the "Decreased Spousal Benefit and
Increased Survivor Benefit" modification, the family equivalence data
indicate that a nearly equal percent of men and women are affected by
the modification because the effect of the benefit change is shared by
both spouses. Therefore, in order to identify only the percent of men
and women who had changes to their own benefit as a result of the
program change, percentages are also calculated based on benefits not
adjusted for household size.
Table 17: Simulation Results of the Dependent Care Credit under
Alternative Benchmark Scenarios, for the 1950 and 1985 Birth Cohorts:
Benchmark: Promised benefits;
Dependent care credit: Cohort: Percentage change in median benefits for
individuals whose benefits changed, benefits adjusted for household
size: 1950;
Dependent care credit: All men: Percentage change in median benefits
for individuals whose benefits changed, benefits adjusted for household
size: 2.60;
Dependent care credit: All women: Percentage change in median benefits
for individuals whose benefits changed, benefits adjusted for household
size: 3.24.
Benchmark: Promised benefits;
Dependent care credit: Cohort: Percentage change in median benefits for
individuals whose benefits changed, benefits adjusted for household
size: 1985;
Dependent care credit: All men: Percentage change in median benefits
for individuals whose benefits changed, benefits adjusted for household
size: 2.06;
Dependent care credit: All women: Percentage change in median benefits
for individuals whose benefits changed, benefits adjusted for household
size: 2.63.
Dependent care credit: Benchmark: Funded benefits;
Dependent care credit: Cohort: Percentage change in median benefits for
individuals whose benefits changed, benefits adjusted for household
size: 1950;
Dependent care credit: All men: Percentage change in median benefits
for individuals whose benefits changed, benefits adjusted for household
size: 2.58;
Dependent care credit: All women: Percentage change in median benefits
for individuals whose benefits changed, benefits adjusted for household
size: 3.24.
Dependent care credit: Benchmark: Funded benefits;
Dependent care credit: Cohort: 1985;
Dependent care credit: All men: Percentage change in median benefits
for individuals whose benefits changed, benefits adjusted for household
size: 2.07;
Dependent care credit: All women: Percentage change in median benefits
for individuals whose benefits changed, benefits adjusted for household
size: 2.61.
Dependent care credit: Benchmark: Promised benefits;
Dependent care credit: Cohort: Percentage of specified subpopulation of
simulated sample whose benefits changed, benefits adjusted for
household size: 1950;
Dependent care credit: All men: Percentage of specified subpopulation
of simulated sample whose benefits changed, benefits adjusted for
household size: 60.71;
Dependent care credit: All women: Percentage of specified subpopulation
of simulated sample whose benefits changed, benefits adjusted for
household size: 57.98.
Dependent care credit: Benchmark: Promised benefits;
Dependent care credit: Cohort: Percentage of specified subpopulation of
simulated sample whose benefits changed, benefits adjusted for
household size: 1985;
Dependent care credit: All men: Percentage of specified subpopulation
of simulated sample whose benefits changed, benefits adjusted for
household size: 57.05;
Dependent care credit: All women: Percentage of specified subpopulation
of simulated sample whose benefits changed, benefits adjusted for
household size: 60.52.
Dependent care credit: Benchmark: Funded benefits;
Dependent care credit: Cohort: Percentage of specified subpopulation of
simulated sample whose benefits changed, benefits adjusted for
household size: 1950;
Dependent care credit: All men: Percentage of specified subpopulation
of simulated sample whose benefits changed, benefits adjusted for
household size: 60.47;
Dependent care credit: All women: Percentage of specified subpopulation
of simulated sample whose benefits changed, benefits adjusted for
household size: 58.04.
Dependent care credit: Benchmark: Funded benefits;
Dependent care credit: Cohort: Percentage of specified subpopulation of
simulated sample whose benefits changed, benefits adjusted for
household size: 1985;
Dependent care credit: All men: Percentage change in median benefits
for individuals whose benefits changed, benefits adjusted for household
size: 56.94;
Dependent care credit: All women: Percentage change in median benefits
for individuals whose benefits changed, benefits adjusted for household
size: 60.25.
Dependent care credit: Benchmark: Promised benefits;
Dependent care credit: Cohort: Percentage of total simulation
population whose benefits changed, benefits adjusted for household
size: 1950;
Dependent care credit: All men: Percentage of total simulation
population whose benefits changed, benefits adjusted for household
size: 28.43;
Dependent care credit: All women: Percentage of total simulation
population whose benefits changed, benefits adjusted for household
size: 30.83.
Dependent care credit: Benchmark: Promised benefits;
Dependent care credit: Cohort: Percentage of total simulation
population whose benefits changed, benefits adjusted for household
size: 1985;
Dependent care credit: All men: Percentage of total simulation
population whose benefits changed, benefits adjusted for household
size: 35.06;
Dependent care credit: All women: Percentage of total simulation
population whose benefits changed, benefits adjusted for household
size: 30.99.
Dependent care credit: Benchmark: Funded benefits;
Dependent care credit: Cohort: Percentage of total simulation
population whose benefits changed, benefits adjusted for household
size: 1950;
Dependent care credit: All men: Percentage of total simulation
population whose benefits changed, benefits adjusted for household
size: 28.32;
Dependent care credit: All women: Percentage of total simulation
population whose benefits changed, benefits adjusted for household
size: 30.86.
Dependent care credit: Benchmark: Funded benefits;
Dependent care credit: Cohort: Percentage of total simulation
population whose benefits changed, benefits adjusted for household
size: 1985;
Dependent care credit: All men: Percentage of total simulation
population whose benefits changed, benefits adjusted for household
size: 27.79;
Dependent care credit: All women: Percentage of total simulation
population whose benefits changed, benefits adjusted for household
size: 30.84.
Dependent care credit: Benchmark: Promised benefits;
Dependent care credit: Cohort: Percentage of specified subpopulation of
simulated sample whose benefits changed, individual benefits not
adjusted for household size: 1950;
Dependent care credit: All men: Percentage of specified subpopulation
of simulated sample whose benefits changed, individual benefits not
adjusted for household size: 47.85;
Dependent care credit: All women: Percentage of specified subpopulation
of simulated sample whose benefits changed, individual benefits not
adjusted for household size: 52.56.
Dependent care credit: Benchmark: Promised benefits;
Dependent care credit: Cohort: Percentage of specified subpopulation of
simulated sample whose benefits changed, individual benefits not
adjusted for household size: 1985;
Dependent care credit: All men: Percentage of specified subpopulation
of simulated sample whose benefits changed, individual benefits not
adjusted for household size: 44.21;
Dependent care credit: All women: Percentage of specified subpopulation
of simulated sample whose benefits changed, individual benefits not
adjusted for household size: 55.59.
Dependent care credit: Benchmark: Funded benefits;
Dependent care credit: Cohort: Percentage of specified subpopulation of
simulated sample whose benefits changed, individual benefits not
adjusted for household size: 1950;
Dependent care credit: All men: Percentage of specified subpopulation
of simulated sample whose benefits changed, individual benefits not
adjusted for household size: 47.83;
Dependent care credit: All women: Percentage of specified subpopulation
of simulated sample whose benefits changed, individual benefits not
adjusted for household size: 52.60.
Dependent care credit: Benchmark: Funded benefits;
Dependent care credit: Cohort: Percentage of specified subpopulation of
simulated sample whose benefits changed, individual benefits not
adjusted for household size: 1985;
Dependent care credit: All men: Percentage of specified subpopulation
of simulated sample whose benefits changed, individual benefits not
adjusted for household size: 44.13;
Dependent care credit: All women: Percentage of specified subpopulation
of simulated sample whose benefits changed, individual benefits not
adjusted for household size: 55.27.
Dependent care credit: Benchmark: Promised benefits;
Dependent care credit: Cohort: Percentage of total simulation
population whose benefits changed, individual benefits not adjusted for
household size: 1950;
Dependent care credit: All men: Percentage of total simulation
population whose benefits changed, individual benefits not adjusted for
household size: 22.11;
Dependent care credit: All women: Percentage of total simulation
population whose benefits changed, individual benefits not adjusted for
household size: 28.27.
Dependent care credit: Benchmark: Promised benefits;
Dependent care credit: Cohort: Percentage of total simulation
population whose benefits changed, individual benefits not adjusted for
household size: 1985;
Dependent care credit: All men: Percentage of total simulation
population whose benefits changed, individual benefits not adjusted for
household size: 21.38;
Dependent care credit: All women: Percentage of total simulation
population whose benefits changed, individual benefits not adjusted for
household size: 28.71.
Dependent care credit: Benchmark: Funded benefits;
Dependent care credit: Cohort: Percentage of total simulation
population whose benefits changed, individual benefits not adjusted for
household size: 1950;
Dependent care credit: All men: Percentage of total simulation
population whose benefits changed, individual benefits not adjusted for
household size: 22.11;
Dependent care credit: All women: Percentage of total simulation
population whose benefits changed, individual benefits not adjusted for
household size: 28.29.
Dependent care credit: Benchmark: Funded benefits;
Dependent care credit: Cohort: Percentage of total simulation
population whose benefits changed, individual benefits not adjusted for
household size: 1985;
Dependent care credit: All men: Percentage of total simulation
population whose benefits changed, individual benefits not adjusted for
household size: 21.34;
Dependent care credit: All women: Percentage of total simulation
population whose benefits changed, individual benefits not adjusted for
household size: 28.54.
Source: GAO analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70.
[End of table]
Table 18: Simulation Results for Dependent Care Credit by Income
Quintile under Alternative Benchmark Scenarios, for the 1950 and 1985
Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70. Income
quintiles are based on the distribution of the present value of family
lifetime earnings for the whole population (male and female).
[End of table]
Table 19: Simulation Results for Dependent Care Credit by Marital
Status under Alternative Benchmark Scenarios, for the 1950 and 1985
Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70.
[End of table]
Table 20: Simulation Results for Increased Survivor Benefit Only under
Alternative Benchmark Scenarios, for the 1950 and 1985 Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70.
[End of table]
Table 21: Simulation Results for Increased Survivor Benefit Only by
Income Quintile under Alternative Benchmark Scenarios, for the 1950 and
1985 Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70. Income
quintiles are based on the distribution of the present value of family
lifetime earnings for the whole population (male and female).
[End of table]
Table 22: Simulation Results for Increased Survivor Benefit Only by
Marital Status under Alternative Benchmark Scenarios, for the 1950 and
1985 Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70.
[End of table]
Table 23: Simulation Results for Increased Survivor Benefit and
Decreased Spouse Benefit under Alternative Benchmark Scenarios, for the
1950 and 1985 Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70.
[End of table]
Table 24: Simulation Results for Increased Survivor Benefit and
Decreased Spouse Benefit by Income Quintile under Alternative Benchmark
Scenarios, for the 1950 and 1985 Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70. Income
quintiles are based on the distribution of the present value of family
lifetime earnings for the whole population (male and female).
[End of table]
Table 25: Simulation Results for Increased Survivor Benefit and
Decreased Spouse Benefit by Marital Status under Alternative Benchmark
Scenarios, for the 1950 and 1985 Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70.
[End of table]
Table 26: Simulation Results for Reduced Marriage Requirement for
Divorced Spouse Benefits under Alternative Benchmark Scenarios, for the
1950 and 1985 Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70.
[End of table]
Table 27: Simulation Results for Reduced Marriage Requirement for
Divorced Spouse Benefits by Income Quintile under Alternative Benchmark
Scenarios, for the 1950 and 1985 Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70. Income
quintiles are based on the distribution of the present value of family
lifetime earnings for the whole population (male and female).
[End of table]
Table 28: Simulation Results for Reduced Marriage Requirement for
Divorced Spouse Benefits by Marital Status under Alternative Benchmark
Scenarios, for the 1950 and 1985 Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70.
[End of table]
Table 29: Simulation Results for Increased Minimum Benefit under
Alternative Benchmark Scenarios, for the 1950 and 1985 Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70.
[End of table]
Table 30: Simulation Results for Increased Minimum Benefit by Income
Quintiles under Alternative Benchmark Scenarios, for the 1950 and 1985
Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70. Income
quintiles are based on the distribution of the present value of family
lifetime earnings for the whole population (male and female).
*Contrary to the pattern for the 1950 cohort, the median change for the
highest income quintile of the 1985 cohort among women who had a
simulated benefit change is larger than the median change for some of
the other income quintiles. The median change in this quintile,
however, is consistent with our assessment from both cohorts that
higher median changes occur in lower income quintiles. Also, it is
worth noting that in the highest income quintile, women who had
simulated benefit changes accounted for less than 0.25 percent of the
population in each cohort.
[End of table]
Table 31: Simulation Results for Increased Minimum Benefit by Marital
Status under Alternative Benchmark Scenarios, for the 1950 and 1985
Birth Cohorts:
[See PDF for image]
Source: GAO Analysis of GEMINI model.
Note: Simulations calculated benefits for individuals at age 70.
[End of table]
[End of section]
Appendix III: Low Benefit Avoidance Rates:
The low benefit avoidance rate is expressed as the percent of
retirement years in which an individual's Social Security benefits
(plus any earnings) are above a low-benefit threshold (set at $9,669
for individuals and $12,186 for couples, in 2007 dollars). Both income
and the threshold are based on individual data when unmarried and on
couple data when married.
Table 32: Average Low Benefit Avoidance Rates Before and After
Modifications for Individuals with Less Than 100 Percent Low Benefit
Avoidance Pre-Modification:
[See PDF for image]
Source: GAO analysis based on GEMINI model.
Note: Simulations calculated benefits for individuals at age 70.
[End of table]
[End of section]
Appendix IV: Effect of Simulated Reform on Social Security System
Solvency:
Table 33: Changes in the 75-year Actuarial Balance as a Percentage of
Taxable Payroll resulting from Program Modifications, after Achieving
75-Year Solvency with Benchmark Scenarios:
Modification: Dependent care credit;
Promised benefits (tax increase only): -0.17;
Funded benefits (proportional benefit reduction only): - 0.19.
Modification: Increased survivor benefit only;
Promised benefits (tax increase only): -0.07;
Funded benefits (proportional benefit reduction only): -0.14.
Modification: Increased survivor benefit with decreased spousal
benefit;
Promised benefits (tax increase only): 0.02;
Funded benefits (proportional benefit reduction only): -0.06.
Modification: Reduced marriage requirement (from 10 years to 7 years);
Promised benefits (tax increase only): -0.02;
Funded benefits (proportional benefit reduction only): -0.06.
Modification: Increased minimum benefit;
Promised benefits (tax increase only): -0.05;
Funded benefits (proportional benefit reduction only): -0.13.
Source: GAO analysis of SSASIM model.
[End of table]
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contact:
Barbara D. Bovbjerg, Director (202) 512-7215:
Acknowledgments:
Alicia Puente Cackley, Assistant Director; Mindy Bowman, Analyst-in-
Charge; Jennifer Cook, Analyst; and Meaghan Muldoon Mann, Senior
Analyst, made significant contributions to all phases of this report.
In addition, Melinda Cordero, Nagla'a El-Hodiri, and Walter Vance
provided data analysis; Joseph Applebaum, Michael Collins, Chuck Ford,
Gene Kuehneman and Ken Stockbridge provided methodological assistance;
Sheila McCoy provided legal assistance; Marc Goldwein and Emily
Pickrell assisted with data collection and analysis; and Sue Bernstein,
Kim Granger, Kevin Kumanga, Lise Levie, and Beth Morrison assisted in
report development.
[End of section]
Footnotes:
[1] The Board of Trustees, Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds, The 2007 Annual Report of the Board
of Trustees of the Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds (Washington, D.C.: Apr. 23, 2007).
[2] Family structure changed substantially during the later part of the
20th century. According to the Census Bureau, in 1970, about 70 percent
of all households were composed of married couple families. By 2003,
this had fallen to less than 52 percent. In addition, the proportion of
families with children that were headed by a single parent increased
from 13 percent in 1970 to 32 percent in 2003.
[3] We used the GEMINI model under a license from the Policy Simulation
Group, a private contractor. GEMINI estimates individual effects of
policy scenarios for a representative sample of future beneficiaries.
GEMINI can simulate different reform features for their effects on the
level and distribution of benefits. See appendix I for more detail on
the modeling analysis, including a discussion of our assessment of the
data reliability of the model.
[4] We did not simulate pension benefits for the 1950 birth cohort
because the current version of PENSIM does not have a realistic
characterization of pre-1996 employer pension offerings, and therefore
should not be used to simulate lifetime pension accumulation for
cohorts born before 1975.
[5] There are both advantages and disadvantages of using such measures.
For additional information on the development, use, and limitations of
equivalence scales see, Constance F. Citro and Robert T. Michael
(eds.), Measuring Poverty: A New Approach, Washington, DC: National
Academy Press, 1995 and GAO, Social Security: Program's Role in Helping
Ensure Income Adequacy, GAO-02-62 (Washington, D.C.: Nov 30, 2001).
[6] For more information on our adjustment of income, see appendix I.
[7] This variable is called the "low benefit avoidance rate." It is
produced by the model and is expressed as a percentage of retirement
years in which Social Security benefits (plus any earnings) are above a
predetermined low benefit threshold. The threshold is measured
separately for married couples and for unmarried individuals. It does
not include pension income or savings, and so cannot be called a true
poverty-avoidance measure.
[8] See appendix I for a complete description of our benchmark policy
scenarios.
[9] The Board of Trustees, Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds, The 2007 Annual Report of the Board
of Trustees of the Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds.
[10] Also, some proposals would change the structure of the program to
incorporate a system of individual accounts. Many such proposals would
reduce benefits under the current system and make up for those
reductions to some degree with income from the individual accounts.
[11] Although DC plans generally are not required to have an annuity
option, certain DC plans, known as money purchase plans, are required
to make an annuity payout option available to participants. In
addition, lump sum distributions from DB plans are becoming more
common.
[12] The difference in annuity benefits for men and women exists only
for private annuities. In 1983, the U.S. Supreme Court held that an
employer's use of sex-segregated actuarial tables to calculate
retirement benefits is unlawful, whether or not the tables reflect an
accurate prediction of the longevity of women as a class. Arizona
Governing Comm. for Tax Deferred Annuity and Deferred Compensation
Plans v. Norris, 463 U.S. 1073, 1084 (1983).
[13] GAO analysis of National Income and Product Accounts (NIPA) data
from the Bureau of Economic Analysis (BEA). Personal saving, as
measured in the NIPA, does not include capital gains on existing assets
because capital gains reflect a revaluation of the nation's existing
capital stock and do not provide resources for financing investment
that adds to the capital stock. In other words, although an individual
household can tap its wealth by selling assets to finance consumption
or accumulate other assets, the sale of an existing asset merely
transfers ownership;
it does not generate new economic output.
[14] In 2006 and 2007, an individual may make a contribution of up to
$4,000 annually to a spousal IRA. The contribution amount increases to
$5,000 in 2008 and will be adjusted based on inflation after that. In
addition, those over age 50 are permitted to contribute an additional
$1,000 per year.
[15] The Kaiser/HRET Employer Health Benefits 2001 to 2006 Annual
Surveys found that between 2001 and 2006 the share of employers with
200 or more workers offering retiree health benefits remained
relatively steady, with about 35 percent offering retiree health
benefits in 2006. Survey data also show that retiree health benefits
are most likely offered by large or unionized firms.
[16] People aged 85 or more are much more likely to be covered only by
Medicare than those in the 65-74 age category.
[17] However, women make up the majority of the poor elderly recipients
of the Supplemental Security Income program--a joint federal-state
poverty program designed to help the elderly (and the blind and
disabled of all ages), who have little or no income, meet their basic
needs for food, clothing, and shelter.
[18] Patrick Purcell, Topics in Aging: Income of Americans Age 65 and
Older, 1969 to 2004 (Washington, D.C.: Congressional Research Service,
2006).
[19] The Census Bureau's Current Population Survey, measures the
sources and amount of income people receive. It does not, however,
measure a person's wealth, which would include the total amount of
lifetime savings. Consequently, in this report, asset income refers to
income received from interest or dividends earned on savings, as well
as rents and royalties from other types of property.
[20] If the worker is covered by a DB plan or by certain DC plans, such
as a money purchase plan, the pension plan is required to obtain the
written consent of the worker's spouse if the worker declines the
qualified joint and survivor annuity option.
[21] A joint and survivor annuity provides income to the surviving
spouse should the retired worker die first. However, one study found
that 28 percent of married men and 69 percent of married women opted
for single life annuities instead of joint and survivor annuities. See
Richard W. Johnson, Cori E. Uccello, and Joshua H. Goldwyn, Single Life
vs. Joint and Survivor Pension Payout Options: How Do Married Retirees
Choose? The Urban Institute, September 2003.
[22] People and families are classified as poor if their income is less
than the federal poverty level. The official weighted average poverty
threshold in 2005 for a single person age 65 or older was $9,367. For a
two-person household in which at least one member was at least 65 years
old, the poverty threshold was $11,815.
[23] While the decline in men's labor force participation occurred in
most age groups, it was more rapid among those aged 55 years and older.
[24] Mitra Toossi, "A New Look at Long-Term Labor Force Projections to
2050," Monthly Labor Review, vol. 129, no.11 (November 2006).
[25] GAO, Women's Earnings: Work Patterns Partially Explain Difference
between Men's and Women's Earnings, GAO-04-35 (Washington, D.C.: Oct.
31, 2003).
[26] U.S. Department of Labor, Bureau of Labor Statistics, Women in the
Labor Force: A Databook, Report 996 (Washington, D.C.: September 2006).
[27] U.S. Department of Labor, Bureau of Labor Statistics, Women in the
Labor Force: A Databook.
[28] GAO-04-35.
[29] Alicia Munnell and Pamela Perun, "An Update on Private Pensions,"
Issue Brief No. 50 (Center for Retirement Research, Boston College:
August 2006).
[30] Employee Benefit Research Institute, "Employment-Based Retirement
Plan Participation: Geographic Differences and Trends, 2005," Issue
Brief No. 299, November 2006.
[31] More than 19 million women aged 65 and older received benefits for
December 2005. About 39 percent were entitled solely to a retired
worker benefit. Almost 30 percent were dually entitled to a retired
worker benefit and a wife's or widow's benefit. About 31 percent were
receiving wife's or widow's benefits only.
[32] Benefit levels are determined by averaging the highest 35 years of
indexed covered earnings. Years spent out of the labor force are
represented by zeros. Consequently, an intermittent work history and
lower wages result in a lower benefit level.
[33] Janet Wilmoth and Gregor Koso, "Does Marital History Matter?
Marital Status and Wealth Outcomes among Pre-Retirement Adults,"
Journal of Marriage and Family 64 (February 2002): 254-268;
Patricia A. McManus and Thomas A. DiPrete, "Losers and Winners: The
Financial Consequences of Separation and Divorce for Men," American
Sociological Review 66, no. 2 (April 2001): 246-268;
Richard W. Johnson, Gordon B.T. Mermin, and Cori E. Uccello, When the
Nest Egg Cracks: Financial Consequences of Health Problems, Marital
Status Changes, and Job Layoffs at Older Ages, (Urban Institute:
January 2006).
[34] Rose M. Kreider, "Number, Timing, and Duration of Marriages and
Divorces: 2001," Current Population Reports P70-97, (U.S. Census
Bureau, Washington, D.C.: February 2005);
Richard Peterson, "A Re- Evaluation of the Economic Consequences of
Divorce," American Sociological Review 61, no. 3 (June 1996): 528-536;
Jay D. Teachman and Kathleen M. Paasch, "Financial Impact of Divorce on
Children and Their Families," The Future of Children 4, no. 1, (Spring
1994): 63-83;
Karen C. Holden and Pamela J. Smock, "The Economic Costs of Marital
Dissolution: Why Do Women Bear a Disproportionate Cost?" Annual Review
of Sociology 17 (1991): 51-78.
[35] Kreider, "Number, Timing, and Duration of Marriages and Divorces:
2001," 13.
[36] Jacqueline L. Angel, Cynthia J. Buckley, Ronald J. Angel and Maren
A. Jimenez, The Economic Consequences of Marital Disruption for Pre-
Retirement Age: African-American, Hispanic and Non-Hispanic White
Women, University of Texas at Austin. Paper presented at the Population
Association of America Annual Meeting, Minneapolis, Minnesota (May
2003).
[37] Barbara A. Butrica and Howard M. Iams, "Divorced Women at
Retirement: Projections of Economic Well-Being in the Near Future,"
Social Security Bulletin 63, no. 3 (2000): 8.
[38] While the majority of women receive Social Security retirement
benefits based, at least in part, on their own work record, among women
age 65 and older who received Social Security benefits in December
2005, 31 percent received benefits based exclusively on their marital
history, and about 30 percent were "dually entitled";
i.e., benefits were based on both their own work record and their
marital history. In comparison, the percentage of women who received
divorced spousal benefits was relatively small. Whereas close to 15
million women received benefits as a retired worker in December 2005,
less than 500,000 received benefits as either a divorced spouse or
divorced widow. See Social Security Administration, Annual Statistical
Supplement to the Social Security Bulletin, 2006, SSA Publication No.
13-11700, Washington, D.C., June 2007, pp. 2, 5.3, 5.10, and 5.17.
[39] Kreider, "Number, Timing, and Duration of Marriages and Divorces:
2001," 9.
[40] The Employee Retirement Income Security Act of 1974, as amended,
governs areas such as pension coverage, vesting periods, benefit
accrual and distribution, and survivor's benefits.
[41] Pub. L. No. 98-397.
[42] 29 U.S.C. § 1056(d)(3).
[43] Unpaid leave includes all unpaid maternity, sick, and vacation
leave, and other unpaid leave. See Julia Overturf Johnson and Barbara
Downs, "Maternity Leave and Employment Patterns of First-Time Mothers:
1961-2000," Current Population Reports P70-103, U.S. Census Bureau,
Washington, D.C., October 2005, p. 9.
[44] U.S. Department of Labor, Bureau of Labor Statistics, Women in the
Labor Force: A Databook, Report 996 (Washington, D.C.: September 2006).
[45] Richard W. Johnson and Joshua M. Wiener, "A Profile of Frail Older
Americans and Their Caregivers," Occasional Paper 8, Urban Institute:
(February 2006).
[46] Institute for Women's Policy Research, "The Widening Gap: A New
Book on the Struggle to Balance Work and Caregiving," Research in Brief
C349 (October 2001).
[47] Courtney C. Coile, "Health Shocks and Couples' Labor Supply
Decisions," National Bureau of Economic Research Working Paper 10810
(September 2004).
[48] Mature Market Institute at Metropolitan Life Insurance Company,
MetLife Juggling Act Study: Balancing Caregiving with Work and the
Costs Involved. Findings from a National Study by the National Alliance
for Caregiving and the National Center on Women and Aging at Brandeis
University (November 1999); National Alliance for Caregiving and AARP,
Caregiving in the U.S. (April 2004); Genworth Financial, The Impact of
Long Term Care on Women-An Analysis of Women as Care Providers and Care
Recipients, 2006.
[49] Chizuko Wakabayashi and Katharine M. Donato, "The Consequences of
Caregiving: Effects on Women's Employment and Earnings," Population
Research and Policy Review 24, no. 5, (October 2005): 482.
[50] Other factors, such as education, marital status, and race, appear
to be correlated with whether the female caregivers live in poverty.
See Chizuko Wakabayashi and Katherine M. Donato, "Does Caregiving
Increase Poverty in Later Life? Evidence from the Health and Retirement
Survey." Journal of Health and Social Behavior 47 (September 2006):
264.
[51] Richard W. Johnson, Gordon B.T. Mermin, and Cori E. Uccello, "How
secure are retirement nest eggs?" Issue in Brief No. 45, Center for
Retirement Research at Boston College (April 2006); Purvi Sevak, David
R. Weir, and Robert J. Willis, "The Economic Consequences of a
Husband's Death: Evidence from the HRS and AHEAD," Social Security
Bulletin 65, no. 3 (2003/2004): 31-44; and Catherine D. Zick and Karen
Holden, "An Assessment of the Wealth Holdings of Recent Widows,"
Journal of Gerontology: Social Sciences 55B, no. 2 (2000): S90-S97.
Note: While research has shown that widowhood increases the incidence
of poverty among women who were not poor when married, some research
indicates that many widows in poverty also had poor economic status in
marriage as well. (See, Sevak, Weir, and Willis, "The Economic
Consequences of a Husband's Death"; Zick and Holden, "An Assessment of
the Wealth Holdings of Recent Widows.")
[52] A widow or widower who meets eligibility requirements is entitled
to receive a percentage of the deceased spouse's Social Security
benefits ("survivor benefits") or benefits based on his or her own work
history--whichever is greater. Generally, the survivor is entitled to a
benefit in the amount of the deceased spouse's PIA. However, the
survivor's benefit amount may be reduced if the deceased spouse retired
before reaching full retirement age, or increased if the deceased
spouse delayed retirement beyond the full retirement age.
[53] Federal Interagency Forum on Aging-Related Statistics. Older
Americans Update 2006: Key Indicators of Well-Being. Federal
Interagency Forum on Aging-Related Statistics. Washington, D.C.: U.S.
Government Printing Office, May 2006, p. 29.
[54] Jeffrey R. Brown and Amy Finkelstein, "Supply or Demand: Why is
the Market for Long-Term Care Insurance So Small?" National Bureau of
Economic Research, Working Paper 10782 (September 2004).
[55] Adrienne Jones, The National Nursing Home Survey: 1999 summary.
National Center for Health Statistics. Vital Health Stat 13(152). 2002;
Current Home Health Care Patients. National Center for Health Care
Statistics, Centers for Disease Control and Prevention, February 2004.
[hyperlink,
http://www.cdc.gov/nchs/about/major/nhhcsd/nhhcshomecare3.htm]
[56] Kathleen McGarry and Robert F. Schoeni, "Medicare Gaps and Widow
Poverty," Social Security Bulletin 66, no. 1, (2005) and Genworth
Financial, The Impact of Long Term Care on Women;
Johnson, Mermin, and Uccello, "When the Nest Egg Cracks."
[57] Genworth Financial, The Impact of Long Term Care on Women.
[58] McGarry and Schoeni, "Medicare Gaps and Widow Poverty."
[59] Under the "Promised Benefits" benchmark, the "increased survivor
benefits with decreased spousal benefits" modification resulted in a
positive impact on the 75 year actuarial balance. For all solvency
results, see appendix IV.
[60] For more information on the Policy Simulation Group's models, see
appendix I.
[61] Outcomes from each reform could be different for individuals at
ages other than 70, particularly as the incidence of widowhood in the
population increases at higher ages.
[62] Melissa Faverault and Eugene Steuerle, Social Security Spouse and
Survivor Benefits for the Modern Family (Washington DC: Urban
Institute, 2006).
[63] Melissa Favreault and Frank Sammartino, The Impact of Social
Security Reform on Low-Income and Older Women (Washington D.C.: Urban
Institute, 2002).
[64] Some dependent care proposals might also provide enhanced benefits
to individuals caring for dependent adults. However, for ease of
modeling we simulated a proposal in which the benefits were limited to
those with young dependent children. Proposals that do include benefits
for adult caregivers would likely affect a larger number of
beneficiaries than the version we simulated.
[65] Individuals in the sample population that met these criteria were
credited with one-half of average wages (as measured by the Average
Wage Index used by the Social Security Administration) for up to 5
years. If both parents meet these criteria in any given year, only the
lower-earning parent would receive the credit;
if parents had identical earnings, the credit is split evenly. The
credit would not contribute to quarters of coverage for eligibility
purposes. The design of this reform effectively would provide a limited
minimum benefit for workers with children under 5.
[66] We used the 1950 and 1985 simulated birth cohorts in all of the
simulations of Social Security reform elements presented in this
report.
[67] This reform would reduce the 75-year solvency achieved by the
"promised benefits" benchmark by 0.19 percent. The "promised benefits"
benchmark achieves 75-year solvency by increasing payroll taxes by the
amount of Social Security's actuarial deficit as a percentage of
payroll. For more information on this and the "funded benefits"
benchmark see appendix I. For a summary of the solvency impact of all
simulated modification under both the "promised benefits" and the
"funded benefits" benchmarks see appendix IV.
[68] Previous to the Special Primary Insurance Amount, Social Security
had a Minimum Benefit that did not target lifetime low earners;
this benefit was criticized for providing windfall benefits for workers
with only a minimal attachment to the Social Security system.
[69] See Office of the Chief Actuary, Social Security Administration,
Estimated OASDI Financial Effects of the "Bipartisan Retirement
Security Act of 2005" (Nov. 4, 2005) at [hyperlink,
http://www.ssa.gov/OACT/ solvency/Kolbe_20051104.pdf].
[70] For data, see appendix II, table 30.
[71] The increased minimum benefit, as we've modeled it, would reduce
the 75-year actuarial balance achieved by the "Promised benefits"
benchmark by 0.05 percent. For more information on this and the "Funded
benefits" benchmark, see appendix I. For a summary of the solvency
impact of all simulated reforms under both the "Promised benefits" and
the "Funded benefits" benchmarks see appendix IV.
[72] A potential unintended consequence of a more generous minimum
benefit is that higher benefits may disqualify certain individuals from
Supplemental Security Income (SSI) eligibility. This is significant for
some beneficiaries living in states that provide automatic Medicaid
eligibility for SSI recipients.
[73] For the 1985 cohort, this reform had an impact on twice the number
of widows in the "Funded benefits" framework than in the "Promised
benefits" framework; this is because the "Funded benefits" results in
lower benefit levels and more survivors have incomes below the cap of
average PIA.
[74] As simulated, this change would reduce the 75-year solvency
achieved by the "Promised benefits" benchmark by 0.07 percent. For more
information on this and the "Funded benefits" benchmark see appendix I.
For a summary of the solvency impact of all simulated changes under
both the "Promised benefits" and the "Funded benefits" benchmarks see
appendix IV.
[75] Based on our simulation, this change would improve the 75-year
actuarial balance achieved by the "Promised benefits" benchmark by 0.02
percent. The "Funded benefits" benchmark does not fully offset;
the solvency impact of this reform on the "Funded benefits" benchmark
is - 0.06%
[76] In 1995, 30 percent of marriages ended in divorce within the first
10 years.
[77] Based on our simulation, this change would reduce the 75-year
solvency achieved by the "Promised benefits" benchmark by 0.02 percent
of payroll.
[78] Pension reforms were modeled using only the 1985 cohort, as PENSIM
model data are not valid for cohorts born before 1975 (per PENSIM
documentation).
[79] Defined benefit plans promise to provide a benefit that is
generally based on an employee's salary and years of service. Defined
contribution plans have individual accounts to which the employer,
employees, or both make periodic contributions. For more information,
see GAO, Answers to Key Questions about Private Pension Plans, GAO-02-
745SP (Washington, D.C.: Sept.18, 2002).
[80] Plans with cliff vesting have a specified point at which
participants have a right to benefits accrued to date and benefits
accrued thereafter. For more information, see GAO-02-745SP.
[81] Plans with graduated vesting give participants a right to an
increasing percentage of their total accrued benefit over time. For
more information, see GAO-02-745SP.
[82] The Pension Protection Act of 2006 accelerated some vesting
requirements for DC plans.
[83] One survey found that the most frequently cited reason for not
participating in a retirement plan when a plan was offered by employers
was an insufficient period of employment (39 percent of male employees
versus 35 percent of female employees).
[84] We simulated pension income only for the 1985 birth cohort because
the current version of PENSIM does not have a realistic
characterization of pre-1996 employer pension offerings and therefore
should not be used to simulate lifetime pension accumulation for
cohorts born before 1975.
[85] "Lump-Sum Distributions," EBRI Notes, Volume 16, no.12 (Employee
Benefit Research Institute, December 2005).
[86] While these models use sample data, our report, like others using
these models, does not address the issue of sampling errors. The
results of the analysis reflect outcomes for individuals in the
simulated populations and do not attempt to estimate outcomes for an
actual population.
[87] MINT3 is a detailed microsimulation model developed jointly by the
Social Security Administration, the Brookings Institution, RAND, and
the Urban Institute to project the distribution of income in retirement
for the 1931 to 1960 birth cohorts.
[88] We did not simulate pension benefits for the 1950 birth cohort
because the current version of PENSIM does not have a realistic
characterization of pre-1996 employer pension offerings, and therefore,
should not be used to simulate lifetime pension accumulation for
cohorts born before 1975.
[89] See GAO, Social Security: Criteria for Evaluating Reform
Proposals, GAO/T-HEHS-99-94 (Washington, D.C.: Mar. 25, 1999), and GAO,
Social Security: Evaluating Reform Proposals, GAO/AIMD/HEHS-00-29
(Washington, D.C.: Nov. 4, 1999).
[90] For a discussion of individual equity issues, see GAO, Social
Security: Issues in Comparing Rates of Return with Market Investments,
GAO/HEHS-99-110 (Washington, D.C.: Aug. 5, 1999).
[91] GAO-02-62.
[92] The Board of Trustees, Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds, The 2007 Annual Report of the Board
of Trustees of the Federal Old-Age and Survivors Insurance and Federal
Disability Insurance Trust Funds (Washington, D.C.: Apr. 23, 2007).
[93] There are both advantages and disadvantages of using such
measures. For additional information on the development, use, and
limitations of equivalence scales see, Constance F. Citro and Robert T.
Michael (eds.), Measuring Poverty: A New Approach, Washington, DC:
National Academy Press, 1995, and GAO, Social Security: Program's Role
in Helping Ensure Income Adequacy, GAO-02-62 (Washington, D.C.: Nov 30,
2001).
[94] This change is similar to one scored by OCACT as part of the 1994-
96 Advisory Council Report, which estimates a 0.32 percent increase to
the long-range actuarial deficit. However, the OCACT scoring of the
similar change in the 1994-96 Advisory Council Report did not include a
cap at the level of average benefits, so the impact on long-range
solvency was greater. A capped version of an increase in survivors'
benefits was presented as part of Estimates of Financial Effects for
Three Models Developed by the President's Commission to Strengthen
Social Security in January 2002; for these outcomes, please see the
description of "increase survivor benefit" change.
[95] These benchmarks were first developed for our report GAO-02-62. We
have since used them in other studies, including GAO-03-310; GAO,
Social Security Reform: Analysis of a Trust Fund Exhaustion Scenario,
GAO-03-907 (Washington, D.C.: July 29, 2003); GAO, Social Security and
Minorities: Earnings, Disability Incidence, and Mortality Are Key
Factors That Influence Taxes Paid and Benefits Received, GAO-03-387
(Washington, D.C.: Apr. 23, 2003); GAO-04-747; and GAO, Social Security
Reform: Implications of Different Indexing Choices, GAO-06-804
(Washington, D.C.: Sept. 14, 2006).
[96] The Social Security actuaries provided these scorings for a
previous report and used assumptions from the 2001 trustees' report.
The actuaries did not believe it was necessary to provide new scorings
using updated assumptions for the purposes of our study, since the
assumptions and the estimates of actuarial balance on which they are
based have changed little from the 2001 report. In particular, they did
not believe that the differences in assumptions would materially affect
the shape of the distribution of benefits, which is the focus of our
analysis. All estimates related to the indexing scenarios and benchmark
policy scenarios were simulated using the SSASIM OLC mode.
[97] Advisory Council on Social Security. Report of the 1994-1996
Advisory Council on Social Security, Vols. 1 and 2. Washington, D.C.:
Jan. 1997.
[98] See GAO-03-907, in which we analyzed such a policy scenario under
a congressional request.
[99] The highest 35 years of salary are used in the calculation of a
retired worker benefit. The disabled worker benefit is calculated using
the number of years between the age of entitlement and age 21, divided
by 5.
[100] Other analyses have addressed the concern about the effect of the
proportional reduction on low earners by modifying that offset to apply
only to the 32 and 15 percent formula factors. The MTR policy in the
1994 to 1996 Advisory Council report used this approach, which in turn
was based on the individual account (IA) proposal in that report.
However, the MTR policy also reflected other changes in addition to PIA
formula changes.
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