Virginia Reno Commentary on:

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1 Virginia Reno Commentary on: Social Security Spouse and Survivor Benefits for the Modern Family By Melissa M. Favreault and C. Eugene Steuerle August 10, 2006 Issues about family benefits and Social Security have been around a very long time. It was a quarter of a century ago (almost to the month) that Gene, Rich Burkhauser and I were talking about these issues at an American Enterprise Institute conference on Taxing the Family. Just a year earlier in 1980, the Institute for Research on Poverty at the University of Wisconsin held an entire conference on Social Security and the Changing Roles of Women and Men, with the proceedings edited by Rich Burkhauser and Karen Holden. In his foreword to the book, Institute Director Gene Smolensky set the context: A veritable concatenation of trends makes this a timely volume indeed. Women have entered the work force in large number and therefore pay social security taxes and become entitled to benefits on the face of it a happy enough development. The probability that marriages will end in divorce has risen dramatically, not so happy a development. The Social Security system has reached maturity, as new beneficiaries have contributed to the retirement system over the whole of their working lives on the face of it, an inevitable event bringing neither great joy nor sorrow, even to actuaries. Coming together now in the early 1980s, these three events coalesce into one large and widely recognized problem, but there is no agreed-upon solution. An informed public discourse must start us toward consensus. This book moves us down that road. What happened to the movement toward consensus that began 26 years ago? Before answering that question I will comment briefly on how the current paper measures retirement income adequacy. A Comment on Adequacy Favreault and Steuerle use three outcome measures to assess Social Security policy changes: (a) winners and losers; (b) changes in the ratio of benefits to taxes for individuals; and (c) adequacy, which is measured as poverty reduction I hope we can come up with better measures of adequacy. When Mollie Orshansky first developed poverty lines in 1963, she emphasized that they do not define 1

2 adequacy. They are measures of poverty, or inadequacy. She created several measures and the lowest one became the official threshold. It was billed as basic minimal spending needs during temporary emergencies. Since then, the poverty thresholds are updated only to keep pace with price changes. To simulate those thresholds out to 2049 is, in effect, defining poverty based on living standards of nearly a century earlier. With such an outdated poverty threshold, very few people are counted as poor in 2049, leaving little room for discernable improvement in the policy options. In the simulations, the poverty rate under current law and the five options rounds off to 5 percent in every case (ranging from just over 4.5 to just under 5.5 percent). Better measures of adequacy could peg future retirement income to some measure of prevailing wages, say some fraction of the average or median wage. This would relate adequacy to rising levels of living for the working population and allow for a range of concepts of adequacy. Using a wholly different approach, research is underway to develop standards of adequacy by pricing out the cost of basic necessities. Researchers have developed Family Self-Sufficiency Standards for working families of different sizes in various cities around the country. The same group is now developing measures of income sufficiency for retirees. These might provide insights for assessing retirement income adequacy in the future. The key point is that the poverty threshold was not designed to measure adequacy, and the further we are from the living standards of the 1950s, the more inadequate it becomes. What Happened to the Debate on Family Benefits? Policy makers have long sought to improve the adequacy of Social Security benefits for women and families. Benefits for wives and widows were added in Incremental changes in the 1960s, 70s and 80s improved benefits for women living alone by raising the level of widows benefits and extending to divorced women the benefits available to wives and widows. As the women s movement gained momentum in the 1970s, advocates coalesced around earnings sharing as a comprehensive way to improve adequacy and security for women. The plan had philosophical appeal in that it applied 2

3 the principle of marriage as a partnership of equals to divide Social Security wage credits equally between husbands and wives. Those shared credits would then be used to compute the benefit for each spouse. Neither would be dependent on the other. At least five official reports by the Department of Health and Human Services between 1978 and 1985 looked in growing detail how to adopt earnings sharing. A nongovernment group of experts also developed a detailed plan. 1 In the end, enthusiasm waned. Three basic problems bogged down support for earnings sharing. First, some widows and divorced women that proponents hoped to help would be made worse off. This would occur if existing survivor benefits are phased out as earnings sharing phases in. Favreault and Steuerle s simulations also show this result. Second, earnings sharing would make families worse off when only the primary earner is retired, disabled, or deceased. While it produces intended results when couples retire together, earnings sharing brings sharp reductions in family benefits when only the main breadwinner is retired (or disabled or deceased). Third is the implementation dilemma. Whose earnings would be split and for what years would they be split? These policy questions are harder to answer in real life than in simulations (where subjects don t get to vote the policy designer out of office!). On the one hand, would it be acceptable to require that couples split wage credits retrospectively that is, for years of marriage prior to enactment? Would it be required even if it made one party much worse off (as it often would!)? Would it be required if it 1 A 1987 Report of the HEW Task Force on the Treatment of Women included an early version of an earnings sharing plan; the 1979 report by the Department of Health, Education and Welfare (HEW), Changing Roles of Men and Women, featured a model earnings sharing plan and a model double-decker plan and was used to generate public discussion at town meetings throughout the nation; the Report of the 1979 Advisory Council on Social Security, included tentative recommendations for partial earnings sharing; in 1980, a Department of Health and Human Services (HHS) staff Working Paper developed details of the plan recommended by the 1979 Advisory Council and concluded that some hard choices in implementation would have to be made; the 1983 amendments to the Social Security Act required a study by HHS of ways to implement earnings sharing, including transitions provisions; the Report on Earnings Sharing Implementation Study was issued by HHS in 1985 and reprinted by the Ways and Means Committee; later in 1985, the Congressional Budget Office independently analyzed the same options in its report, Earnings Sharing Options for Restructuring the Social Security System; and finally, a non-government group of experts met over the course of several years to refine an earnings sharing plan. Its report, Earnings Sharing in Social Security: A Model for Reform, published by the Center for Women Policy Studies in 1988 and edited by Edith U. Fierst and Nancy Duff Campbell, reports a model plan, including transition plans and cost estimates. 3

4 made the entire family worse off? Would persons divorced when the new law was passed be required to divide credits from prior marriages that had already ended? On the other hand, if wage credits are not split retrospectively, is it worth doing? Earnings-sharing reforms were driven by the desire to help women who are approaching retirement or already retired. If wage credits were split only prospectively, the change would be of little help to mid-life women and no help to such women who are already divorced. If there is a lesson in the demise of support for earnings sharing over the last 25 years, it may be that such comprehensive reforms are not worth the effort because they produce so many unintended consequences when applied to the highly diverse family situations of the entire populace. Incremental changes have a better chance of producing intended results whatever they may be. The Social Security policy debate today is quite different. For good or ill, it is generally not about raising the level of benefits or improving the security and adequacy of benefits. Proposals to change the form of Social Security to personal accounts, as the President has proposed, would also pose a host of issues about how benefits would be paid to family members. The Academy s study panel report, Uncharted Waters: Paying Benefits from Individual Accounts in Federal Retirement Policy, is a first cut at understanding what those family benefit issues might be. 4

5 References: Burkhauser, Richard V. and Karen C. Holden (eds.), A Challenge to Social Security: The Changing Roles of women and Men in American Society, Institute for Research on Poverty Monograph Series, Academic Press, New York. Congressional Budget Office, Earnings Sharing Options for the Social Security System, January. Development of the Advisory Council s Interim Recommendation on the Treatment of Women, Office of Policy, U.S. Department of Health and Human Services, Washington, DC, September 12. Fierst, Edith U. and Nancy Duff Campbell (eds.), Earnings Sharing in Social Security: A Model for Reform, Report of the Technical Committee on Earnings Sharing, Center for Women Policy Studies, Washington, DC. Pearce, Diana and Jennifer Brooks, The Self-Sufficiency Standard for the Washington, DC Metropolitan Area, Wider Opportunities for Women, Washington, DC, Fall. Penner, Rudolph G. (ed.), Taxing the Family, A Conference Sponsored by the American Enterprise Institute for Public Policy Research, Washington, DC. Reno, Virginia, Kenneth Apfel, Michael Graetz, Joni Lavery and Catherine Hill, Uncharted Waters: Paying Benefits from Individual Accounts in Federal Retirement Policy, Study Panel Final Report; National Academy of Social Insurance, Washington, DC. Report of the HEW Task Force on the Treatment of Women under Social Security, 1978, U.S. Department of Health, Education and Welfare, Washington, DC, February. Report on Earning Sharing Implementation Study, Subcommittee on Social Security, U.S. Ways and Means Committee, Committee Print 99-4, February 14. Social Security and the Changing Roles of Men and Women, U.S. Department of Health, Education and Welfare, Washington, DC, February. Social Security Financing and Benefits: Report of the 1979 Advisory Council on Social Security, U.S. Department of Health, Education and Welfare, Washington, DC, December 7. 5