AARP Wrong on Social Security and Women

October 21, 2003

A new study by AARP provides some quick facts on the relative importance of Social Security for women. However, the study claims Social Security is responsible a numerous social benefits without taking into consideration what could happen under an alternate system including individual accounts. Essentially, the study over-sells Social Security in its current state. Several of AARPs claims follow:

1) AARP: "Social Security's progressive benefit formula protects low- and moderate-wage earners: Social Security's benefit formula ensures that lower-wage workers and their families receive a higher return relative to their contributions than high-wage workers. At the normal retirement age, Social Security replaces approximately 56 percent of the average lifetime earnings of low-wage workers, 42 percent of the average lifetime earnings of average-wage workers, and 35 percent of the average lifetime earnings of high-wage workers. Individual accounts would lack this earnings redistribution."

Response: While the redistribution appears progressive, Social Security is generationally regressive. Low-income workers have no opportunity to save under the current system. African American males who, on average, have a lower life expectancy in every wage group fare the worst under Social Security. According to a 2002 report from the National Center for Health Statistics, only 39.8 percent of black males live to 67, the age one becomes eligible for full Social Security benefits (see Table 8). Second, most personal accounts proposals are progressive, allowing low-income workers the opportunity to divert a larger portion of wages into individual accounts. These funds are then subject to compound interest over a lifetime.

2) AARP: "Social Security helps keep women aged 65 and older out of poverty: The poverty rate for women would be significantly higher without Social Security, increasing from 12.4 percent to over 50 percent."

Response: They simply look at how many more people would be in poverty if we forced people to pay Social Security taxes but didn't pay them any benefits. The real question is how many people would be in poverty if they could invest their payroll taxes in individual accounts. This statement also disregards the effect of inheritance on low-income groups.

3) AARP: "Social Security's spousal and survivor benefits are especially important to women. Dually entitled beneficiaries qualify for their own retired worker benefits; however, they are entitled to higher benefits based on earning histories of their husbands and so receive the higher of the two benefits. Wives as well as divorced women who had been married to their ex-husbands for at least ten years are entitled to spousal benefits amounting to 50 percent of the benefits of their husbands or ex-husbands. Upon widowhood, they are automatically eligible for a benefit amounting to 100 percent of their current or former husband's benefit."

Response: Well-overlooked by AARP are the millions of workingwomen who contribute to Social Security over the course of their lives and yet receive no more in benefits than those wives who never worked. This distortion becomes clear as you can see from the internal rates of return for Social Security benefits. According to an actuarial note from the Social Security Administration, high-income one-earner couples consistently receive a higher rate of return on Social Security contributions than do low- and mid-income dual-earning couples.

Also lost in the current equation are the millions of divorced women who do not receive any financial return for their years of marriage. According to the National Center for Health Statistics, the average duration of a marriage ending in divorce is 7 years. Thus, the ten-year requirement for spousal and survivors benefits in fact denies those many women any retirement funds that would be available to them under a system of individual accounts that naturally include earnings sharing between spouses.

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