Here is a little information about my mother’s social security.
She earned her A.S. credentials through apprenticeship-style training back when it was possible because her old-world father would only sign off on a limited range of jobs for his daughters. She worked until shortly after the birth of my older sister, then resigned from her position and became a stay-at-home mom because she was bored of the long trip to my grandmother’s house to drop off my sister before starting her shift. Money was tight, to be sure — we kids wore hand-me-downs — so she returned to work after my brother started school. Still, she never returned to hospital nursing, instead of working at an orthodontist’s office, a market research firm, and a variety of other jobs, mostly part-time and with various periods of nonworking, eventually ending up with a long stint at a department store before retiring.
Their finances are now in good shape in retirement, thanks to Dad’s salary during their working years, as well as his pension and joint savings (Dad: “Yeah, I know, all your friends are going to Disney, but we save our money instead”). However, her Social Security payout is still far lower than her father’s, which bolstered by his whole career of full-time middle-management employment.
Is it “only” that her stipend is so tiny? Is it “fair” that she, like many other women, chose to stay at home with their children and, as a result, has lower lifetime earnings? In 2015, the average annual Social Security retirement payment for women was $14,184, while the average annual Social Security retirement benefit for men was $18,000.
What, if any, adjustments ought to be made to the Social Security benefit formula to make the situation more “fair”? In my last column, I argued that the top-up to 50% of the primary earner’s benefit was a simple means of simulating a gift for women who, as caretakers, lacked their own earnings history. But implicit in my depiction is the notion that it isn’t the most excellent strategy, even if it may grow on you when you view a woman’s husband’s salary with her potential income had she not quit her job. So here are a few other options.
Option 1: Eliminate the benefit supplement. After all, one can assume that if a married couple chooses to have one stay at home to care for their children, they did so because they could maintain a decent level of living on one salary, and why should they need a supplement now? And, legally speaking, it’s a tax break for women who want to stay at home or work part-time. On the other hand, suppose these women have financial difficulties due to the “grey divorce” phenomenon. In that case, the Social Security benefits their husbands have received, as well as workplace pensions, IRAs, and other assets and income, can be included in the total divorce agreement.
Option 2: Income-splitting in place of the top-up. Instead of providing a top-up based on their husband’s benefit, they should add up their earnings in any given year, and half of the payments should correspond to each spouse’s earnings history. That means that if they both earned equivalent sums before marriage, they’d have similar Social Security benefits when they retire. In addition, the bill eliminates the diminished benefits that women receive due to staying at home with kids while their husbands work. That stops any unjust cross-subsidies because no one gets benefits they did not deserve.
The Social Security Administration published a paper in 2009 that modeled variations of this option. They discovered that
- Thirteen percent of people would experience no change in their benefit,
- 29 percent would receive a gain of 8 percent on average
- 58 percent would suffer a drop of 11 percent on average.
For a net loss of 4% in average benefits, which is either a win for solvency and fairness for the childless or punishment and a take-away, depending on one’s perspective. According to the study, despite prior discussion of this possible modification, this idea never had a public hearing.
Option 3: Provide child-rearing credits as a third option. Many European systems adopt this technique, albeit the exact implementation varies. In Germany, for example:
Since 1992, a parent who cares for a child aged 0 to 3 has earned one earnings point each year for each child born. Nonworking parents who were caring for at least two children aged ten or younger receive 0.33 earnings points per year if they have at least 25 years of paid or credited contributions and continue to work part-time while caring for a child aged 0 to 10. The value of contributions paid is increased to 1.5 times the value, up to the value of contributions for the average earnings of all insured persons.
As of January 1, 2005, mothers can accrue contribution years under their pension insurance for time spent raising children and time spent working. In addition, if a father can prove that he was the primary caregiver for the child/ren, such as as a lone parent or a male homemaker living with a working mother, those years will be counted as contributory years. The maximum credit per child from the pension insurance is four contributed years (five years in case of multiple births). For 2014, pension contributions for periods spent raising children were computed using a monthly assessment base of 1.649,84 €.
In Switzerland, stay-at-home women have access to a pension
Bonuses for raising children or giving care: an increase in income taken into account when calculating the pension for parents of children under the age of 16 and those caring for close relatives who require care.
The benefits design varies depending on whether one needs to be out of work to qualify for these benefits or if having a child allows one.
Canada is arguably the finest example of how such a system may work in the United States. Since Social Security is based on the 35 years with the highest wage-increase-indexed wages, reducing the number of years in the averaging period would help top-up benefits for individuals with low average earnings due to childrearing. Of course, taking into account missed earnings growth due to missing promotional raises, this wouldn’t make moms whole, but it’s probably about as good as it gets.
For further information, the Social Security Administration published a paper in 2011 that went into great length on possible caregiver credit designs and international comparisons.
Option 4: You guessed it, my retirement system proposal, which deserves a better name than “Purpose-based plan,” as well as other similar plans throughout the world that give advantages solely based on having lived to retirement age, regardless of how much or how little one has worked, or for what reasons, for higher-earners, with or without means-testing for higher-earners. Yes, we’d have a slew of other debates, like whether the government has a policy commitment to do anything about lower lifetime earnings leading into a lower “second-tier” benefit, but at the very least, everyone’s baseline benefit would be the same.
What do you think is reasonable? What is it that is unjust? Again, it depends on whether the goal is to balance advantages between spouses or ex-spouses or whether the fundamental premise is that the state should reward or compensate parents in some way. After all, regardless of how enticing caregiver credits are as a “good thing” for the government to do, the final consequence is still the giving of benefits to perfectly middle-class families, just as different parental leave schemes would.
And all of this is linked to worries about women’s retirement assets and income, which is a topic for another day.