By tweaking Social Security benefits to eliminate an ostensible loophole favoring married couples (especially wealthier couples), the recent budget deal in Washington shed light on one little-known complexity in the program.
It also gives us a chance to dig deeper into some of the program’s embedded inequities. There are more of these than you may think, and they largely harm lower-income families and especially women.
They’ve been ferreted out by C. Eugene Steuerle of the Urban Institute, one of our most penetrating analysts of the program. He noted in a recent blog post that although proponents of the budget deal have been braying about the significance of its Social Security “reform," in fact the change will have almost no impact on the program’s fiscal health and will do nothing to fix the unfairness of its treatment of spouses.
Social Security spousal and survivor benefits are so peculiarly designed they would be judged illegal...if private pension or retirement plans tried to implement them.
“Social Security spousal and survivor benefits are so peculiarly designed that they would be judged illegal and discriminatory if private pension or retirement plans tried to implement them," Steuerle observes. "And as far as the benefits are meant to adequately support spouses and dependents in retirement, they are badly and regressively targeted.”
The problem is how to make them better; given the vested interest that millions of retirees and near-retirees have in the system as it is, making changes is a daunting political challenge, every bit as difficult as tax reform.
More on that in a moment. First, here’s how Steuerle outlines the chief inequities in Social Security today:
"--A poor or middle-income single head of household raising children will pay tens of thousands of dollars more in taxes and often receive tens of thousands of dollars fewer in benefits than a high-income spouse who doesn’t work, doesn’t pay taxes and doesn’t raise children.
"--A one-worker couple earning $80,000 annually gets tens of thousands of dollars more in expected benefits than a two-worker couple with each spouse earning $40,000, even though the two-worker couple pays the same amount of taxes and typically has higher work expenses.
"--A person divorcing after nine years and 11 months of marriage gets no spousal or survivor benefits, while one divorcing at 10 years and one month gets the same full benefit as one divorcing after 40 years.
"--A man with a much younger wife will receive much higher family benefits than one with a wife roughly the same age as him.”
A couple of explanatory notes: Most of the single heads of household in the first category are probably women who have been divorced, widowed, or abandoned by their spouses. As for divorced persons, they’re entitled to Social Security’s spousal benefit (50% of the full retirement stipend of their spouse) if they were married to the spouse for at least 10 years. One day short of that mark, and they’re out of luck. There’s no limit to the number of spouses who can claim the full spousal benefit; theoretically, a serial-marrying man or woman can leave three or four divorced partners behind.
Finally, the worker with a younger spouse gains more in family benefits because the younger spouse is likely to collect spousal benefits over a longer period, until he or she passes on. This is different from most private defined-benefit plans, which require the family to take a lower annual benefit while they’re both living in order to provide a life benefit for the surviving spouse.
These inequities have arisen largely because of the evolution of family structure in America over the last 80 years. As we observed earlier this week, the traditional nuclear family comprising one breadwinner and one caregiver unemployed outside the home has yielded to two-earner couples, sometimes with the wife earning more than the husband.
According to the Bureau of Labor Statistics, the percentage of two-earner couples rose from 43.6% in 1967 to nearly 53% in 2011. The percentage of women aged 25-54 in the labor force rose from 37% in 1950 to 75% in 2010, the agency says. (See the graphs; these percentages certainly would have been even lower in 1935, when Social Security was enacted, but the bureau doesn’t provide statistics that far back.)
Social Security’s benefit formula, which counts a worker’s 35 highest-earning years in calculating retirement benefits, doesn’t reflect that evolution. As a result, Steuerle observes, a worker earning $30,000 annually for 40 years will get a smaller benefit than one who earned $40,000 annually for 30 years, even though their total lifetime wages were identical.
Some Social Security provisions are specifically designed to be progressive, helping lower-income workers more than the wealthy. The “replacement rate” — the proportion of lifetime earnings replaced by Social Security benefits — is higher for lower-wage retirees, for example. Benefits are equivalent to about 57% of the lowest-wage worker’s average annual income, but only 20% for high-wage workers, according to an official calculation.)
But that only partially compensates for the other inequities Steuerle identifies. So what’s the remedy? Unfortunately, changes thus far have tended to be piecemeal and haphazard. They’re not aimed at fixing what’s wrong with the program, but in meeting political needs to reach a budget compromise.
“Tightening the screws on one leak among many,” Steuerle noted, really helped no one. “As for the single parents raising children — perhaps the most sympathetic group in this whole affair — they got no free spousal and survivor benefits before, and they get none after.”
Steuerle’s specific proposals to make the system more progressive can be found here. But enactment and implementation are still obstacles. The government could empanel experts specifically to examine the unfairness issues, but the political impulse will be to place some sort of fiscal fix at the top of the agenda, with everything else secondary. That’s upside down, since meeting the needs of single parents, widows, and divorcees is necessary “whether you have a bigger system or smaller,” Steuerle says.
But until we place the needs of the beneficiaries first, unfairness will remain embedded in the nation’s most important anti-poverty program for decades, even generations.