	Background

Social Security is a retirement income program whose benefits are based, in part, on an individual’s earnings. A spouse’s receiving dependent benefits does not reduce the size of the worker’s own benefit. Women’s Benefits Differ From Men’s Because of Labor Market Differences

Women’s Social Security benefits are currently lower, on average, than men’s because their labor force participation rates and earnings are lower. The gaps are not expected to disappear entirely, even in the long term. The difference in labor force participation has implications for women’s level of Social Security benefits relative to men’s, since under the current rules Social Security calculates monthly benefits on the basis of lifetime taxable earnings averaged over a worker’s 35 years of highest earnings. Even if earnings for men and women and their labor force participation behavior were equalized starting today, women would continue to have lower benefits than men until the 2030s because earnings are averaged over 35 years; it would take that long for benefits to be equalized. Since retirement income benefits are based on both amount of earnings and number of years in the labor force, the gap will continue to produce lower benefits, on average, for women than for men. With Individual Accounts, Women May Fare Worse Than Men Because They Are More Risk Averse

Many of the reform proposals call for the creation of mandatory savings accounts that allow workers to make their own investment decisions. Although proponents argue that privatization could allow for higher retirement benefits for both men and women, a too-conservative investment strategy could leave women with lower final account balances than men, even if both make the same contributions to their accounts. Thus, even though women could be better off under a privatized system, compared to the current Social Security system, the gap between men’s and women’s benefits could increase. Our analysis, using different data and focusing on individuals in their prime working and saving years, increases the robustness of this conclusion. By investing less in these riskier assets, women benefit less from the potentially greater rates of return that, in the long run, stocks could generate. Costs of and Rules on Annuitization and the Effect on Women’s Benefits

Some proposals for reforming Social Security would not require retirees to purchase an annuity with the funds in their retirement income accounts. That is, insurance companies take into account women’s longer life expectancy and either provide a lower monthly benefit to women or charge women more for the same level of benefits given to men.Insurance companies also pay lower benefits for a joint and survivor annuity that covers both husband and wife than for a single life annuity that covers only the worker during his or her lifetime, again because the total time in which the benefits are expected to be paid is longer. The effect of individual changes in the reform proposals could be relatively minor. Some groups of women may be at risk of receiving lower retirement income benefits under some of the Social Security reform proposals, and other groups may lose their eligibility for benefits entirely. Nevertheless, investor education that covers general investment principles and financial planning advice might help both men and women to better manage their investments.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the issue of social security reform and women's retirement income, focusing on: (1) why women's benefits are lower than men's under the current social security system; (2) the possible differential effects on women of the new privatization reform proposals; and (3) what can be done to minimize the possibly negative effect on women of certain elements of the social security reform proposals.

What GAO Found

GAO noted that: (1) women's average social security benefits are lower than men's for a number of reasons, most of which relate to women's lower rates of labor force participation and lower earnings levels; (2) although the labor market differences between men and women have narrowed over time, the Bureau of Labor Statistics does not project that they will disappear entirely, even in the long term; (3) the reform proposals that would create individual private savings accounts and change the way benefits would be distributed from those accounts are the most likely to affect women and men differently; (4) a retirement income system that is based in large part on mandatory contributions of a fixed percentage of earnings and on individuals' making their own investment decisions could lead to women's receiving relatively lower benefits than man; (5) working women earn less than men, on average, and therefore would have fewer funds to invest in their individual accounts; (6) GAO's analysis of women in their prime earning and saving years suggests that they are less likely than men to invest in potentially higher yielding, though riskier, assets such as stocks, which would generally leave them at risk of having accumulated relatively less in their accounts at retirement; (7) even if men and women enter retirement with equal amounts in their individual accounts, women may receive a lower monthly benefit if they buy an individual annuity--a monthly benefit for the life of the worker or the worker and a spouse--because it is adjusted for their greater longevity; (8) changes over time in women's labor force behavior and experience are projected to reduce, but not completely eliminate, the differences in men's and women's labor force participation rates and earnings; (9) any reform of the system that bases benefits on earnings will continue to produce different benefit levels for men and women; (10) if a reformed Social Security system were to rely largely on individual investment, better education about investment strategies and general financial principles might help women workers increase their retirement benefits; (11) in addition, requiring that retirement savings be annuitized would be better protect dependent spouses; and (12) annuities purchased with individual account balances might give rise to differential benefit levels for men and women with the same level of lifetime earnings because women are charged higher annuity prices, based on their longer average lifespan.