Economic Snapshot | Retirement

Social Security privatization’s motherhood penalty

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Snapshot for February 2, 2005

Social Security privatization’s motherhood penalty

Privatization proponents at the Cato Institute have argued that Social Security’s family benefit formula favors high-income, single-earner families over dual-earner families and single workers.1 That’s because married women who stay at home to provide child or elder care receive benefits based on their husband’s earnings. Cato argues that the family norm of a male breadwinner and a stay-at-home mom no longer holds today. Therefore, Cato proposes lowering Social Security benefits for single-earner families and offering voluntary private accounts that reward individual earnings more. Cato argues such a change would be fairer to the modern working woman.

Unfortunately, Cato’s privatization solution is not fair to today’s working women who still take on the majority of child rearing and who have much lower employment rates than men, particularly in their twenties.2 Private accounts exacerbate earnings differences for workers who, for whatever reason, have spells of unemployment when they are young. This group includes women with children who are often either completely out of the labor force or working part time when their children are young. Workers with lower earnings at the outset of their career have significantly lower savings accumulated in their private account because of the power of compound interest.

For example, compare a male high school drop-out to a woman of the same age who stays in school and receives a diploma. The male high school drop-out starts working full time at age 16.3 When the woman finishes high school two year later, she gets married and stays at home with her two young children for their first six years. Between the ages of 24 and 28, she works part time, goes to school part time, and takes care of her children part time. At age 29, when both her children are in school for a full day and she has completed her associate’s degree, she starts her first full-time job.4 Her earnings are slightly higher than the male high school drop-out’s initial and current earnings, because, despite persistent labor force discrimination that maintains a pay gap between men and women, her additional education allows her to get a slightly higher status job.5 While the high school drop-out has stayed consistently employed throughout his life, at age 61, this female worker temporarily leaves the labor market to care for her ailing mother for one year, and then works part time thereafter.6 Both workers retire at age 65.

The figure below shows the Social Security benefits for both of these workers under three scenarios: (1) those benefits promised under current law; (2) those that can actually be paid if no changes are made to the current system (based on the Congressional Budget Office’s 80% assumption); and (3) those implied by the Bush Administration’s Plan 2, which includes both Social Security benefits and income earned from private accounts.


Even though the female high school graduate started out with zero earnings and had very low earnings for the first 11 years when she juggled part-time work, school, and child rearing, under Social Security today, she would receive a higher benefit than the male high school drop-out ($1,361 versus $1,343). That’s because she had higher average earnings over the bulk of her career. Current law only considers the highest paid 35 years of earnings and ignores the rest, so Social Security would not penalize her for the early years when she was staying at home raising her children.7

If privatization were adopted, this male high school drop-out’s private account would be larger than the woman’s in this scenario because of his higher earnings in the earliest years of their workforce participation: his combined monthly benefit would be $909, compared to her benefit of $897.8 So, relative to current law, as well as relative to simply doing nothing to “fix the Social Security crisis,” this female worker is worse off. As for the individual retirement accounts, the high school drop-out’s individual account would give him a boost to his monthly benefit of $75 compared to her monthly individual account benefit of $53.

Ultimately, the individual accounts accumulated over a lifetime really do not add much “security” to either of these workers—his annuity is only 5.6% of currently scheduled benefit, and hers is only 3.9%.

The earlier a person puts money into a private account, the bigger the effect on their retirement annuity. For example, $1,000 earned at age 18 adds almost twice as much to a worker’s total private account than $1,000 earned at age 40. So, women face a tough choice if they reduce their earlier years in the labor force. This privatization solution prefers and subsidizes men, who are better able to enter the labor market early, and punishes women who take time-out early for child care or more education.

1. Leanne Abdnor, “Social Security Choices for the 21st Century Woman,” SSP No. 33 (Cato Institute, February 24, 2004).

2. This is also a problem for young African Americans, who have lower employment rates than whites.

3. In this hypothetical, the male earns $26,216—between the 2003 median and mean of male high school drop outs. All earnings are expressed in 2005 dollars. The earnings of both the male and female grow with average wages in this example.

4. The woman in this hypothetical earns $2,662 annually when initially working part time and $33,877 annually when she starts working full time. Her average annual earnings are higher than the man’s annual earnings ($35,163 versus $33,691). She has a wage premium similar to that of a woman with some college when compared to a male high school drop out.

5. Because of gender discrimination in the workplace, women must have a higher education to earn the same amount as men. For example, in 2003 women who had some college coursework earned $24,018, compared to the median male high school graduate who earned $31,411. There is a similar gap between the earnings of African Americans and whites. Median earning of an African American who finished high school was lower than that for whites ($22,902 versus $31,101).

6. When she returns to the labor market part time in her sixties, she earns $4,823 a year.

7. It similarly would also make up for the challenge faced by young African Americans who, in their twenties struggle to get a foothold in the labor market. The average woman has a little over six years of zero earnings, and the average African American male has four years of zero earnings, compared to two years of zero earnings for white males.

8. We use CBO’s analysis of Plan 2 of the president’s commission (which estimates the effect of the benefit cuts and the “clawback”). We have also gender differentiated the two annuities. Because individuals would have to go to the private market to purchase their annuities, following the remarks of Cong. Bill Thomas, Chair of the House Ways and Means Committee, we have allowed the private market to consider gender in the annuities. We also use CBO’s assumption of a 3.0% rate of return in calculating the annuity. A higher rate of return would make the advantage for the man larger.

This Snapshot was written by EPI Senior Fellow William Spriggs with research assistance by David Ratner.

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