What If? GAO Simulates Changes to Social Security and Retirement Plan Laws

Although it made no recommendations for specific changes, the GAO report, “Retirement Security: Women Face Challenges in Ensuring Financial Security in Retirement,’ said that women have less retirement income than men, largely because of women’s lower labor force attachment and lower earnings, on average, suggesting a need for some reform (See Reform Needed to Address Lower Retirement Income for Women).

Social Security Changes

The GAO simulated the effect of a dependent care allowance that would credit a worker’s earnings record with one-half of average wages in years in which there was a child under five years of age in the household and the worker’s earnings were less than one half of average wages. It evaluated the impact on the Social Security benefits of two simulated populations – one cohort born in 1950 and another born in 1985.

The change affected the largest number of beneficiaries, both men and women, of any of the simulations, the GAO reported.

The simulation showed this dependent care credit resulted in positive median benefit changes for both women and men, though it provided a larger increase in median benefits for women (3.24% and 2.63% for the female cohorts, respectively, compared to 2.6% and 2.06% for the male cohorts).

Women in the lowest earnings quintile had the highest proportionate gain in their Social Security benefits (7.96% and 6.88%, respectively), compared to 2.8% and 2.12% for middle quintile, and .92% and .72% for highest quintile. In both cohorts, never-married women had the largest median change in benefits (7.95% and 6.69%).

Excluding care years from earning averages is an approach that would reduce the standard 35-year basis for determining a worker’s average indexed monthly earnings by subtracting the number of years spent providing care. It generally also specifies a limit for the number of years that can be dropped from the calculation of average earnings.

Because the design specifies years of zero earnings, this approach may not target financially needy populations who lack sufficient resources to take full years off from work, the GAO said. High-income caregivers may be more likely to benefit from such an approach if economic necessity drives low-income caregivers back to the workforce, while those in high-income families are able to stay out of the workforce longer.

To simulate the effect of an increased minimum benefit, the GAO modeled a change to set a minimum benefit of 120% of the federal poverty level for 30-year workers, linearly phased to zero for workers with 20 years or less of covered employment.

Slightly fewer men than women in the simulation were affected by the change and those who were had a slightly lower median benefit change than women affected by the change (8.47% and 6.20% for each male cohort, respectively, vs. 9.89% and 6.70% for each female cohort).

In both cohorts, a larger share of women in the lower two income quintiles had benefit changes resulting from this modification than women in the upper three income quintiles. Never-married and divorced women had much larger percent changes in median benefits (22.8% and 19.01%, respectively, and 17.13% and 14.5%).

A minimum benefit following parameters such as the GAO simulated may increase benefits for both part-time and full-time workers. Because Social Security only tracks annual earnings rather than wages or hours worked, a higher-earning, part-time worker could receive the same benefit as a full-year, low-income worker; meaning enhanced benefits may be provided to individuals who work part time by choice.

GAO modeled a survivor benefit that would provide a surviving spouse with the higher of 75% of the couple’s previous combined benefit level, capped at the average benefit level for all new retirees, or the current law survivor benefit. This simulation resulted in increased benefits for both men and women. While about three times the number of women as men were affected, the magnitude of the benefit change was larger for men who were affected by the program modification – nearly 29% in both cohorts. This is attributable to the increased survivor benefit modification compared to current law. Current law allows survivors the greater of their own benefit or their spouse’s benefit. As most men receive a larger benefit than their spouses, a survivor benefit of the larger of 75% of the couple’s combined benefit (capped at the average benefit level for all new retirees) or the husband’s benefit would provide a higher benefit level than current law to lower-earning men who outlive their wives.

GAO simulated a modification that would reduce the duration of marriage requirement for receiving divorced spouse benefits from 10 to 7 years. In the 1950 and 1985 cohorts, among women who had a benefit change due to the reduced marriage requirement, the median percentage change in benefits was about 65% and 45% respectively, the largest median change in benefits for women among all reforms modeled.

The changes in this simulation also resulted in a handful of newly eligible beneficiaries. Among the seven simulations, this was the only one that resulted in new beneficiaries.

The GAO pointed out each of the Social Security changes it modeled would have small, but negative, effects on program solvency.

Retirement Plan Law Changes

As for changes to retirement plan law, the GAO projected the impact of a reduced vesting schedule on retirement benefits. For DB plans it specified 2- year cliff vesting, and for DC plans it specified 2-year cliff, and 3-year graduated vesting schedules. For the 1985 cohort, the median percentage change in benefit levels for women who were affected by the change was an increase of 6.29%. Similarly, men’s median percentage change in benefits for those affected was 5.74%.

Although the number of women affected by this change was fairly evenly distributed across the top four income quintiles with fewer in the lowest, the median percentage change in benefits is much larger for the women in the lowest quintile than in higher quintiles; for those in the lowest quintile, the median percentage change in benefit levels was more than four times the change for women in the highest quintile and nearly twice that of women in the second lowest income quintile.

While the number of married women affected was larger than the number affected in other marital classifications, the median percentage change in benefits for never married and divorced women was almost twice the median percentage change in benefits for married and widowed women.

GAO also modeled what the impact could be on retirement benefit levels if 100% of accrued retirement balances were reinvested into qualified accounts after every job change until retirement. For the 1985 cohort, the median percentage change in benefits for those affected was quite similar for men and women, 7.3% and 7.63%, respectively. This assumes that those affected would not make any changes in their savings or spending behavior to offset the requirement.

Among women who were affected by the change, those who were never married (15.04%) or who were divorced (12.09%) had the largest percentage median increases in benefits. Additionally, while the number of women affected by this change was fairly evenly distributed across the top four income quintiles, those in the lowest income quintile had substantially larger median percentage changes in benefits than those in the highest quintile (16.94% vs. 3.62%).