How Uniformity Deals with Diversity:
Does One Size Fit All?

Testimony of Darcy Ann Olsen
Entitlements Policy Analyst, Cato Institute

United States House of Representatives Committee on the Budget

May 4, 1999

Mr. Chairman, distinguished members of the committee, colleagues: Thank you for the opportunity to appear before this committee to address Social Security’s impact on different types of workers.

I love the title of this hearing "How Uniformity Deals with Diversity: Does One Size Fit All?" because it painted for me a very funny scenario the minute I heard it. I pictured my 10-year-old sister, she’s about this big and weighs about 60 pounds, putting on my older brother’s suit coat. Now my older brother is 6 foot 6 inches and weighs about 180 pounds. And I can tell you how uniformity deals with diversity when it comes to clothing.

On a serious note, in one fairly important sense, the current Social Security system treats everyone equally because it gives everyone, every worker—no matter what their income, their ancestry, their gender—an inexcusably meager return on a lifetime of payroll tax contributions. Clearly, that’s the most important thing to remember when we decide what the nation’s future retirement system should look like. Substandard returns, whether shared equally or unequally across different populations, are nothing to be proud of.

That said, I have spent a good deal of time studying the impact of the current system on women. The bottom line is that while Social Security does not differentiate between women and men, its impact on men and women is quite different.

• Because women generally work fewer years and earn less than men do, they receive lower benefits from Social Security than men do: the average woman’s benefit is little more than $600 per month, the average man’s benefit is more than $800.



• The result of those lower benefits is higher poverty rates: poverty rates are twice as high among elderly women as among elderly men: 14 percent compared to 6 percent.



• A third problem is that according to the Social Security Administration, 25 percent of women pay into the Social Security system and get back nothing, not a penny, in return. This is the result of something called the dual entitlement rule, which says a woman can collect benefits based on her own work record or based on her status as a spouse—but she cannot collect both. She can only collect the larger of the two. For 25 percent of women, their benefit as spouses are larger than their benefits as workers. Therefore, while a woman might receive a larger check as a spouse than she would have based on her own work record, she has still paid payroll taxes for which she gets nothing. This means that a wife who never enters the workforce or pays a dime in Social Security taxes can, under Social Security, collect the same monthly benefit as a single woman who spent her entire adult life in the workforce.

Supporters of the dual entitlement rule believe this is acceptable because women end up with larger benefits than they would have based on their own work records. The truth is that if Congress would allow women to deposit their payroll taxes into personal retirement accounts, they wouldn’t need that preference. Every dollar they earned would work for them and every dollar would increase their retirement incomes. Couples could also choose to share their earnings, which would further increase retirement funds. I’ve attached a study we published at the Cato Institute, which shows just how much better off women would be if they were allowed to enter a new system of individually owned retirement accounts.

Consider the most difficult scenario: a single woman earning $12,000 a year, roughly the minimum wage. She pays $1,488 per year in Social Security taxes. When she retires, Social Security promises her $683 per month (assuming solvency). If she were allowed to save and invest her money in a portfolio of stocks and bonds earning a 6.2 percent return, she would retire with $936 per month. Those conservatively estimated benefits are roughly 30 percent greater than what she could expect from Social Security.

So, Mr. Chairman, as you know, despite the fact that Social Security’s rules have been written to try to minimize inequality of outcomes, significant differences in outcomes remain. But if we focus on those technical defects, we’d be missing the big picture, which is that Social Security isn’t a very good deal for any worker.

• There are different outcomes for different subgroups of women. Take poverty rates, for example. The poverty rate for women who have never married is 20 percent compared to 5 percent for married women.



• There are also different outcomes for different subgroups of men. For example, because the average African-American male can expect to die almost 2 years earlier than the average Caucasian male, the average African-American male receives 24 fewer payments from Social Security than the average Caucasian male.



• Most workers born around 1960, regardless of gender, marital status, ancestry, or income, can expect rates of return on their payroll tax contributions between 1 and 2 percent.



• A male born two decades later can expect to pay $182,000 more in Social Security taxes than he will receive in benefits.

So while married women may fare better than single women, Caucasian men may fare better than African-American men, and men may generally be said to fare better than women under Social Security, no group fares well.

The most important thing for this task force, this committee, this congress to consider is that a redesigned system that is based on individually owned accounts, can significantly increase the retirement incomes of all workers no matter what their income, their ancestry, or their gender might be. That is how a system of personal retirement accounts will deal with diversity.