Social Security out of step with many modern families

For more than 80 years, Social Security has provided seniors with freedom from poverty after a lifetime of work — an important accomplishment to celebrate as America marks its 240th birthday this week.

But much has changed since the Social Security program was created in the 1930s, when the standard family consisted of a married couple where the husband was the breadwinner and the wife was a homemaker. Since then, the family unit has changed dramatically.

The rise in the employment of married women has diminished the importance of spousal and survivor benefits, according to a new report from the Center for Retirement Research at Boston College. That has led to a significant decline in family benefits as a source of retirement income, Steven Sass, a researcher at the Center for Retirement Research, wrote in his brief “How Work and Marriage Trends Affect Social Security’s Family Benefits.”

Social Security spousal and survivor benefits were designed to provide a basic old-age income to families in which the wife had little or no wage employment. Today, very few wives fit this mold. At the same time, changing marital patterns have reduced the program’s ability to help a large number of divorced and unmarried mothers whose labor market opportunities are constrained by their caregiving responsibilities.

Social Security spousal and survivor benefits guarantee the spouse with lower lifetime earnings a benefit based on the higher-earner’s record. Individuals who are divorced are entitled to these benefits only if the marriage lasted 10 years or more. A spousal benefit is equal to half of the worker’s benefit if collected at full retirement age or later. Survivor benefits guarantee a widow a benefit equal to her husband’s actual benefit amount.

If a woman is eligible for a worker benefit based on her own earnings history that exceeds the spousal or survivor benefit, she will receive the larger amount. If her work benefit is lower, then her combined benefit is topped up to the level of the spousal or survivor benefit.

As late as 1960, more than 55% of women receiving Social Security retirement benefits collected only as a spouse or survivor, with their benefits based solely on their husband’s earnings record. But women now work outside the home nearly as much as men and bring home in incomes much closer to what men bring home.

Because married women work more and earn more, they make a substantial contribution to the household’s pre-retirement income and enter retirement with more Social Security benefits based on their own earnings records. While it may seem counterintuitive, as women work and increase a couple’s pre-retirement earnings, the household’s replacement rate declines. The replacement rate, which is the household’s total Social Security benefit as a percentage of pre-retirement earnings, drops as the wife’s earnings rise relative to her husband’s earnings, Mr. Sass found.

Regardless of the wife’s earnings, the dollar amount of her survivor benefit — equal to her husband’s full benefit amount — remains unchanged. But it replaces a declining share of a couple’s combined benefits once she earns more than a third of what her husband earns, Mr. Sass wrote.
As the employment of married women shot up among baby boomers, so did the incidence of divorce and non-marital births. This trend sharply increased the percentage of families headed by single mothers, which Social Security spousal and survivor benefits were not designed to serve.

Not surprisingly, overall, family benefits account for a much smaller percentage of Social Security outlays today than they did in the past. Outlays have fallen much more for spousal than for survivor benefits as most wives still get a survivor benefit if widowed. Survivor benefits disproportionately go to women in older cohorts who did not have significant employment records. But as older widows die and future widows have more substantial worker benefits, family benefits will likely account for an even smaller share of Social Security outlays.

“Altering Social Security to address these concerns would need to overcome significant political and administrative changes,” Mr. Sass wrote. “But it is worth considering whether other designs would more effectively provide today’s families a basic old-age income after a lifetime of work.”

It seems like a good starting point for discussing needed changes to the nation’s retirement system. The latest Social Security and Medicare Trustees report for 2016 confirms that the Old-Age, Survivors and Disability Insurance (OASDI) program trust funds will be exhausted in 2034. Without congressional action before then, Social Security benefits would have to be cut by about 25%. That is unacceptable.

Social Security reform should be added to the priority action list as America prepares to elect its next president. Program reforms need to address long-term financing issues, generational fairness and a benefit structure appropriate for today’s American families.

(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a certified financial planner.