Replacement rates fall as women’s earnings rise

Here is a stunning statement: Although an increase in women’s workforce participation and average earnings has boosted the income of many American families, it also has reduced household retirement income replacement rates from Social Security.

“The changing role of women has led to a marked decline in replacement rates that will continue for future retirees,” concluded a report released by the Center for Retirement Research at Boston College.

To understand the connection between higher household earnings and reduced income replacement rates, it helps to review how Social Security benefits are determined.

A retired worker’s benefit is based on his or her earnings history and a progressive benefit formula that replaces a higher share of pre-retirement income for lower-income workers. A worker’s base benefit is calculated at Social Security’s full retirement age, which is 66, and the base amount is then reduced for earlier retirement or increased for later retirement.

In addition to the worker’s benefit, Social Security provides dependent benefits to qualified spouses of retired workers. Even if a wife has no work history, she is entitled to a spouse’s benefit equal to 50% of her husband’s base benefit.

If a woman’s earnings history makes her eligible for a benefit higher than the spousal benefit, she gets the larger amount. If her worker benefit is lower, her benefit is increased to the level of the spouse’s benefit.

When most women didn’t work, it was easy to calculate replacement rates. The wife who claimed spousal benefits at full retirement age was entitled to an amount equal to 50% of her husband’s benefits.

So if the replacement rate for the typical worker was 40% of pre-retirement income, the replacement rate for the couple would be 60% (40% + 20%).

INCOME LOWERS BENEFITS

In other words, although married women’s earnings helped to boost a couple’s pre-retirement income, it often resulted in lower income replacement rates in retirement. That’s because higher earners receive a lower replacement rate from Social Security than lower earners. The effect is higher pre-retirement income due to dual incomes, but lower retirement replacement income.

“As women went to work, they increased household earnings more than they increased Social Security benefits, so replacement rates for married couples declined,” the report said.

Women born from 1966 to 1975 entered the labor force at twice the rate of women born in the early 1930s. In addition to higher labor force participation, women’s wages have increased over the decades.

“As more women entered the labor force and their earnings increased relative to their husbands’ earnings, a larger percentage of women qualify for worker-only benefits and a smaller percentage receive only spousal benefits,” the report noted.

Household replacement rates have declined from 47% for Depression era couples to 45% for early-boomer couples born from 1948 to 1953. The trend is expected to continue, dropping to 41% for middle boomers born from 1954 to 1959 and to 37% for late boomers and Generation Xers.

“For both the older and younger cohorts, the decline in replacement rates occurs across all income groups, but is a bit more pronounced in the highest income [group],” the report said. “This pattern reflects the influx of highly educated women into the workforce among dual-earner couples.”

The report added that even though younger generations are projected to retire later, this delay isn’t sufficient to keep pace with the increase in the full retirement age from 66 to 67 for those born in 1960 and later.