How Does the Changing Role of Women Affect Social Security?

Transcription

1 How Does the Changing Role of Women Affect Social Security? April Yanyuan Wu Alicia H. Munnell Boston College and Nadia Karamcheva Urban Institute and Patrick Purcell Social Security Administration 14th Annual Joint Conference of the Retirement Research Consortium August 2-3, 2012 Washington, D.C. This research was supported by a grant from the U.S. Social Security Administration (SSA) as part of the Retirement Research Consortium (RRC). The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, any agency of the federal government, the RRC, or Boston College. The authors would like to thank Zhenya Karamcheva and Katherine Burnham for excellent research assistance. The authors would also like to thank Barbara A. Butrica Karen Smith, and Melissa Favreault for their thoughtful comments.

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3 The general perception is that the Social Security program expanded significantly in the 1970s, and benefits today are much higher relative to pre-retirement earnings than they used to be. Indeed, the Social Security Trustees Report states that replacement rates for the medium earner rose from about 30 percent in the 1970s to 40 percent in the 1980s, where they remain today. But replacement rates for actual individuals and households depend on more than just Social Security provisions; they also depend on labor force activity and household arrangements. While an extensive literature has explored how policy changes affect the Social Security program, only a few have focused on the impacts of demographic factors importantly, the changing role of women. 1 Compared to thirty years ago, women today have higher levels of education, increased labor force participation, more stable career trajectories and higher salaries, and a higher probability of being divorced or never married. The changing role of women has important implications for Social Security replacement rates and solvency. The increasing labor force participation of women, particularly married women who are entitled to the larger of the spouse s benefit or the benefit they could earn on their own, has already boosted the trust funds by substantially lowering the replacement rate for married couples (Munnell, Sanzenbacher, and Soto 2007). The reason is that working wives add substantially more to the couple s pre-retirement earnings than they do to their Social Security benefits (Pattison 2003). This trend will continue over the coming decades, because the real gains in lifetime female labor force participation began with the birth cohorts, which have only recently begun to reach retirement age (Smith and Ward 1985; Favreault and Steuerle 2008). Further, increasing educational attainment among women, as well as changing occupation, and decreasing wage discrimination mean that wages among working women have increased over time. As a result, the couple s replacement rate will continue to decline, although at a slower pace. The more recent trends of lower marriage and higher divorce rates will also have an impact on replacement rates. The share of never-married women reaching retirement has increased and will continue to rise. While divorce rates peaked in the 1980s and 1 Some recent examples include Iams and Tamborini (2012), Butrica, Iams, and Sandell (1999), Butrica and Iams (2000), Favreault, Sammartino, and Steuerle (2002), and Iams et al. (2009). Earlier work includes Burkhauser and Holden, eds. (1982). 1

4 recent marriages are lasting longer, the proportion of ever-divorced women is still increasing (U.S. Census Bureau 2011). Since women are over-represented in the lowest wage jobs, the rise in never-married and divorced women will raise replacement rates. At the same time, fewer women will receive spousal or survivor benefits. 2 How these recent marriage trends impact Social Security replacement rates and the trust fund hinges on the earnings of these divorced or never-married women relative to their husbands or potential spouses. This study has three goals. The first is to investigate how Social Security replacement rates have changed across a broad range of cohorts and within cohorts by marital status and by income distribution. The second goal is to explain the extent to which the changing lives of women can explain the pattern of replacement rates across cohorts. The third goal is to estimate how the changing pattern in replacement rates has affected Social Security finances. This paper focuses on replacement rates benefits as a percent of pre-retirement earnings. While the level of Social Security benefits has increased overtime, wages have as well; so for measuring both adequacy of benefits and impact on the program, replacement rates are the appropriate concept. Of course, Social Security is only one component of retirement income, and therefore Social Security replacement rates alone do not provide a complete measure of retirement income adequacy. But the focus of this study is how the changing lives of women has affected Social Security replacement rates and thereby the cost of the program. The analysis starts with trends in replacement rates for hypothetical households based on the Current Population Survey (CPS). It then turns to the Health and Retirement Study (HRS), which contains lifetime earning profiles of actual workers and details workers demographics and marital status. Finally, it uses Modeling Income in the Near Term (MINT) to project changes in replacement rates for future cohorts. These rich data sources produce replacement rates across a broad range of cohorts: Depression (born ), World War II ( ), Early Baby Boomers ( ), Middle Baby Boomers ( ), Late Baby Boomers ( ), and Generation X ( ). 2 For instance, among divorcees in 1990, 63 percent had marriages that lasted less than 10 years, making them ineligible for spousal or survivor benefits (Smith 2002). 2

5 The results show that, first, the changing role of women has led to a marked decrease in the amount of pre-retirement income Social Security replaces at both the household- and individual-level, a decline that will continue for future retirees. Second, changes at the aggregate level mask the more complex relationship by marital status. The change is modest for the never married, but substantial for married, divorced, and widowed households. And the decline in replacement rates for couples is largest for households with husbands earnings in the top tercile. At the individual level, the decline in replacement rates is most dramatic for widows, and the decline is more pronounced for women than for men. This study then attempts to quantify how much of the decline in replacement rates can be explained by the changing lives of women their labor force participation and marriage patterns as opposed to other major explanation a decline due to the extension of the full retirement age and early claiming. The Blinder-Oaxaca decomposition is employed, and the analysis decomposes the changes into three major components that could contribute to the difference across cohorts: marital status, labor supply, and claiming behaviors. Essentially, the decomposition involves calculating what one cohort s outcomes would have looked like if it had the characteristics of another cohort. The results show that changes in labor force participation, including increased labor supply and earnings, account for more than one-third of the difference in replacement rates between individuals born in the early 1930s and Generation Xers (born ). While marital patterns have also changed dramatically over time, the impact of this factor is relatively small. However, differences in claiming behaviors across cohorts also explain a significant fraction of changing replacement rates. Nevertheless, about 10 percent to 30 percent of the change across all cohorts remains unexplained. These unexplained differences could be driven in part by the underlying assumptions used for the projection, as the explanatory power of the models is significantly higher for consecutive cohorts, especially those who have already claimed Social Security benefits or will do so in the near future. Finally, the study finds that the ratio of benefits to contribution has decline with each cohort, extending the life of the trust fund. 3

6 References: Burkhauser, Richard V. and Karen C. Holden, eds A Challenge to Social Security: The Changing Roles of Women and Men in American Society. New York: Academic Press. Butrica, A. Barbara and Howard M. Iams Divorced Women at Retirement: Projections of Economic Well-Being in the Near Future. Social Security Bulletin 63(3): Butrica A. Barbara, Howard M. Iams and Steven H. Sandell Using Data for Couples to Project the Distributional Effects of Changes in Social Security Policy. Social Security Bulletin 62(3): Favreault, Melissa M., Frank J. Sammartino, and C. Eugene Steuerle, eds Social Security and the Family: Addressing Unmet Needs in an Underfunded System. Washington, DC: Urban Institute Press. Favreault, Melissa M. and C. Eugene Steuerle The Implications of Career Paths for Social Security. Working Paper # , Center for Retirement Research at Boston College. Iams, Howard M., John W. R. Phillips, Kristen Robinson, Lionel P. Deang, and Irena Dushi Cohort Changes in the Retirement Resources of Older Women. Social Security Bulletin 68(4): Iams, Howard M. and Christopher R. Tamborini The Implications of Marital History Change on Women s Eligibility for Social Security Wife and Widow Benefits, Social Security Bulletin 72(2): Munnell, Alicia H., Geoffrey Sanzenbacher, and Mauricio Soto Working Wives Reduce Social Security Replacement Rates. Issue in Brief Chestnut Hill, MA: Center for Retirement Research at Boston College. Pattison, David Labor Force Trends and Future Social Security Benefits. Presented at Retirement Implications of Demographic and Family Change Symposium, sponsored by the Society of Actuaries. San Francisco, CA. Ross, Jane L. and Melinda M. Upp Treatment of Women in the U.S. Social Security System, Social Security Bulletin 56(3): Smith, James P. and Michael P. Ward Times-Series Growth in the Female Labor Force. Journal of Labor Economics 3(1, Part 2): S59-S90. Smith, Karen E The Status of the Retired Population, Now and in the Future. In Social Security and the Family, edited by Melissa M. Favreault, Frank J. Sammartino, and C. Eugene Steuerle, Washington, DC: Urban Institute Press. 4