Column: Did the budget deal close a Social Security ‘loophole,’ or harm poor women?

Congressional negotiators have been congratulating themselves for the budget deal they worked out last week to stave off a debt-limit crisis.

A considerable amount of their crowing has involved changes to Social Security -- “the first significant reform to Social Security since 1983” was the description by one source, who placed the “long-term savings” at $168 billion.

Leaving aside that this figure spans 75 years, meaning it probably averages out to less than one or two tenths of a percent of Social Security’s projected benefit payments over that time, the main change has been a purported closing of a “loophole” that allowed some couples to claim more than their share of benefits. The idea is that the loophole chiefly benefited the wealthy. The truth is, however, that closing it may harm people who already get the least out of Social Security: women, especially widowed and divorced women.

Some Social Security advocates are praising Congress for closing the loophole, which some have decried for a long time. Their argument is that the so-called file-and-suspend option has been mostly exploited by two-earner couples whose lifetime incomes are roughly equivalent and who are healthy enough for at least once spouse to put off claiming benefits until after normal retirement age. These people tend to occupy the high end of the income scale. They also have the best access to professional advice to help them navigate the complexities of the maneuver.

But what about those for whom file-and-suspend is not a loophole but a lifeline? “They’re collateral damage,” said Heidi Hartmann, president of the Institute for Women’s Policy Research, who is one of the few voices opposing the change.

Hartmann observes that the effect on widows and divorced women, among others who could have used file-and-suspend to make their benefits a little less inadequate, reflects our scattershot approach to Social Security in general -- tweaking it at the margins without addressing the real needs of millions of beneficiaries.

“This is a moment when advocates should pivot to how Social Security affects low-income people,” Hartmann said, though she doesn’t sound too optimistic that will happen.

Here’s how it works. Social Security allows married persons to claim either a retired worker benefit based on their own earnings history or a spousal benefit of 50% of the benefit their spouse would get at his or her full retirement age. (That’s 66 for baby boomers born in 1943-1954.)

Under file-and-suspend, married couples can claim a spousal benefit at 66, and switch to their own worker benefits as late as age 70. Deferred benefits gain 8% a year up to that point, so a deferred benefit will pay 36% more per month than one taken at age 66. Once the individual benefit exceeds the spousal benefit -- or the combined husband-and-wife stipend exceeds the 150% spousal benefit -- the couple can switch to individual stipends.

Whether Congress really intended file-and-suspend to become a recognized benefit-enhancing option, there’s no doubt that it arose as an artifact of a 2000 law change aimed at allowing elders to continue earning wages without losing Social Security benefits (see Helaine Olen of Slate for a concise description of how it came about).

Before 2000, Social Security calculated whether a claimant’s individual or spousal benefit was higher, and paid that; the Senior Citizens Freedom to Work Act allowed individuals to choose which benefit to receive. A few years passed before the ramifications of the change were recognized by financial planners and advisors such as Lawrence Kotlikoff of Boston University.

As retirement expert Alicia Munnell observed last year, the strategy allows couples to gain up to four years of spousal benefits that wouldn’t be available under the old system.

In Hartmann’s view, file-and-suspend has allowed lower-income women and couples to bring their Social Security benefits up to a reasonable level. That’s important, she says, because Social Security is not an especially generous system compared with the public retirement programs of other developed countries. She’s right: The U.S. ranks 31st among the 34 members of the Organization for Economic Co-operation and Development in the retirement benefits as the percentage of median earnings (See chart above.)

Moreover, widowed and divorced women have among the highest poverty rates of all women. (See chart below.) They’re most in need of augmented benefits, especially if they’ve spent large portions of their working lives raising children or caring for elderly family members. Their income is also cut sharply when their spouse dies in retirement -- their benefit is ratcheted back to 100% of their spouse’s original benefit, or a reduction of one-third of their joint benefit.

Their position reflects one way in which Social Security has fallen behind changes in family structure over the last 80 years. “The system is still based on the 1930s, when the typical family was a breadwinner and a housewife,” Hartmann said. That leaves behind “divorcees, dual earners, and anyone else who doesn’t fit that lifestyle model.”

File-and-suspend was one way to give them a bit of a boost. Although it has now been taken away, there still hasn’t been a national discussion of alternatives to keep elderly women out of poverty. Hartmann and others advocate pegging benefits after one spouse dies to 75% of the joint benefit, which would be about 12% higher than the one-spouse benefit now. They also propose a “caregiver credit” to replicate the earnings the average women gives up to raise or care for a family.

But no one’s been talking about those options in the last week; they’re only talking about how clever they were to close a “loophole” that cost Social Security almost nothing but leaves a few of its beneficiaries with even less.

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