Social Security is a retirement income program whose benefits are based, in part, on an individual's earnings. Social Security is also gender-neutral--that is, a man and a woman whose labor force participation and earnings are identical, in terms of both extent and timing, will receive the exact same Social Security benefit. When calculating actual benefits, Social Security employs a progressive benefit formula that replaces a relatively larger portion of lifetime earnings for people with low earnings than for people with high earnings. Because women tend to have lower lifetime taxable earnings than men, they generally benefit from this provision. The program also provides benefits to retirees' dependents (such as spouses, ex-spouses, children, and survivors). Many more women than men receive dependent benefits as spouses or survivors. Unlike some pension benefits, these benefits are automatic for all eligible dependents and do not depend on the worker's electing to include them. In general, a retired worker's spouse who is not entitled to benefits under his or her own work record will receive a benefit up to as much as 50 percent of the retired worker's benefit, and a surviving spouse will receive up to as much as 100 percent of the deceased worker's benefit. A spouse's receiving dependent benefits does not reduce the size of the worker's own benefit. Social Security has helped reduce poverty rates for the elderly, from 35 percent in 1959 to less than 11 percent in 1996. Nevertheless, some subgroups of the elderly population are at a greater risk of living in poverty than others. Unmarried women make up more than 70 percent of poor elderly households, although they constitute only 45 percent of all elderly households. Single, divorced, and widowed women aged 65 or older have a poverty rate of 22 percent, compared with 15 percent for unmarried men and 5 percent for married couples older than 65. In addition, some researchers expect the current level of poverty among widows to persist over the next 20 years because there will still be a substantial number of women with a history of low earnings and intermittent labor force attachment whose own worker benefit will not be greater than their widow's benefit. In part, because of the anticipated increase in the size of the elderly population and the growing proportion of the total population that the elderly will constitute over the next 33 years, Social Security's trust funds are projected to be depleted by 2029. A number of proposals have emerged to resolve this difficulty, with a great deal of variety in terms of both how the Social Security program would be structured and who would be eligible for benefits. Appendix II summarizes the key features of the major proposals. Among the various proposals for restoring long-term financial balance to the Social Security system are several that call for some degree of privatization. Some of these privatization proposals would redesign the Social Security system, patterning it, in part, after some private sector pension plans, such as 401(k) plans. Under such a system, a portion of workers' Social Security taxes would be deposited in an investment account that they would then control. By investing in stocks or other assets, workers could increase their retirement savings and potentially increase their retirement benefits. However, they could also lose some portion of their savings for retirement if, for example, stock prices fell. While the data indicate that the U.S. stock market has historically outperformed the implicit return expected from Social Security for today's and future retirees, there is always a risk of loss. The uncertainty of market gains or losses would be borne by the individual, and the individual's retirement income would not be guaranteed by the government as it currently is under Social Security. Retirees could use the payout from individual accounts to buy an annuity, or they could receive a lump-sum distribution of the accumulated savings to manage or spend as they saw fit. In most cases, an annuity lasts for the life of the recipient, removing the risk that retirees will outlive their savings. With a lump sum, retirees may make other choices about the distribution of their assets, including, at their death, bequeathing any remaining funds to their heirs. Women's Social Security benefits are currently lower, on average, than men's because their labor force participation rates and earnings are lower. These gaps are narrower than in past years yet still large enough to affect retirement income benefits. The gaps are not expected to disappear entirely, even in the long term. Women's labor force participation rates continue to be lower than men's at every age, despite substantial increases in women's rates in the past 35 years. On average, the labor force participation rate for women aged 16 and older in 1996 was 59 percent, compared with 75 percent for men. As seen in figure 1, this represents a significant increase for women from 35 years ago, when their labor force participation rate was only 38 percent, compared with 83 percent for men. Figure 2 shows the change in labor force participation rates for women born in different 5-year intervals as they move through their prime-age years (25 to 54). Women born more recently have higher labor force participation rates than older women had at the same age. The labor force participation rates of the younger women do not drop off during their child-bearing years as the older women's did, but the rate of increase in labor force participation for the younger women has slowed. Women today are much more likely to participate in the labor force than in previous generations, but their rate of participation is still below the rate for men. 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. Women generally spend more time out of the labor force than men and have fewer years of taxable earnings, so the calculation of their benefit includes more years with zero earnings. The median number of years with zero earnings for workers turning 62 in 1993 was 4 for men and 15 for women. This results in lower monthly benefits for women relative to men. Women also earn lower wages than men, although some of this difference can be explained by the fact that women more often work part-time. However, even in a comparison of year-round, full-time workers, median earnings for women are still only about 70 percent of men's. This difference further narrows when differences in education, work effort, age, and other relevant characteristics are accounted for, but even then the gap does not close completely, with women earning wages that are 15- to 20-percent lower than men's. These differences in earnings lead to lower Social Security benefits for women relative to men. In 1995, the average monthly benefit for retired workers was $621.30 for women and $810.00 for men; women's average benefit was 77 percent that of men's. 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. Neither the difference between men's and women's labor force participation rates nor the gap in their earnings is expected to disappear in the foreseeable future. As figure 2 shows, the long-term upward trend in women's labor force participation rates has flattened out in recent years. The decline in men's labor force participation is also leveling off, making it less likely that women will have the same rate as men. Because a 15-to-20-percent gap in earnings between men and women remains even after accounting for demographic and labor force characteristics, it is likely that the gap will not close completely. 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. Over the course of their retirement, women might receive benefits for a longer period of time than men because they live longer, but they will not necessarily receive more in total lifetime benefits, and in any case, it is the monthly benefit that is most important to the retiree's standard of living. Many of the reform proposals call for the creation of mandatory savings accounts that allow workers to make their own investment decisions. One consequence of this move might be that individuals would decide to take on more risk in order to earn potentially higher rates of return. Economists have found evidence suggesting that women are generally more risk averse than men in financial decisionmaking. Compared with men, they might choose an investment strategy for their retirement income accounts that earns them lower rates of return. 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. In reality, women's lower average earnings will result in their making smaller average contributions to their accounts than men will make. 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. We attempted to calculate the difference in risk aversion between men and women by looking specifically at the differences in how men and women invest their assets. We found that women aged 51 to 61 in 1992 had a lower percentage of their total assets in stocks, mutual funds, and investment trusts than men did. These assets are riskier, but potentially higher yielding, than others, such as certificates of deposit, savings accounts, or government bonds. On average, we found that the ratio of riskier assets to total assets held by men was 8 percentage points higher than the same ratio for women. Other researchers, looking at participants in the federal Thrift Savings Plan, have also found that women invest less in stocks than men do. 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. At the same time, they are not as exposed to large losses from riskier assets. While it is true that in the past U.S. stocks have almost always posted higher returns than less-risky assets, there is no guarantee that they will always do so. Some proposals for reforming Social Security would not require retirees to purchase an annuity with the funds in their retirement income accounts. At retirement, workers could choose to receive their account balance as a lump-sum payment, as some pension plans now allow, to spend as they see fit. If retirees and their spouses do not accurately predict their remaining lifespans or make poor investment choices, they may end up with very small incomes from assets late in life. Most married women with little work history of their own currently receive a Social Security benefit as a dependent, based on their husband's earnings. Under Social Security, the distribution of benefits to dependents does not reduce a worker's benefit and they are mandatory, so that no worker can opt out of providing them. In contrast, some of the privatization proposals do not automatically provide dependent benefits from the investment portion of the retirement income accounts. Workers may choose not to purchase an annuity at all, or they may choose a single life annuity that ends at the worker's death. Either of these options would put dependent wives at greater risk of having little to live on should their husbands die first. While some retirees might prefer to avoid the cost of an annuity, receiving their account balance as a lump-sum payment to manage as they see fit, others might prefer the security of a guaranteed monthly income for life that an annuity provides and therefore choose to purchase one. However, a man and a woman could retire with similar amounts in their personal accounts under a privatized social security system and still end up with very different monthly benefits if they were to purchase an annuity.Annuities sold to individuals are usually based on gender-specific life tables. 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. Women are more likely to receive the survivor portion of this type of annuity, since they are more likely to outlive their husbands. Thus, while men's and women's total lifetime benefits may be similar, the monthly benefit women receive, either as retirees or as survivors, will likely be lower. Table 1 shows the average monthly benefit paid to men and women at different ages, based on a $100,000 premium, for both single life and joint and full survivor options. At every age, a man's monthly benefit under a single life option is between 8 and 13 percent higher than a woman's. This comparison of average benefits masks significant differences between insurance companies. Table 2 shows for men and women separately, at each age, the highest and lowest monthly benefit paid for a $100,000 premium in a single life plan. While men and women differ little in terms of the variation in monthly benefits, the lowest possible benefit paid to a woman is still lower than the lowest benefit paid to a man of the same age, and the highest possible benefit paid to a woman is also lower than the highest paid to a man. The difference in annuity benefits for men and women exists only for individual annuities. A 1983 Supreme Court ruling requires that employer-provided pension plans use a unisex life table in calculating annuities, so that women and men receive the same monthly benefit.Federal, state, and local pension plans also use unisex life tables in calculating monthly annuity benefits. The market for individual annuities, however, is not covered by the Supreme Court ruling, and it is unclear whether or not annuities purchased from retirement savings accounts in a reformed Social Security system would be covered by the Court ruling. Other proposed changes in various Social Security reform proposals would differentially affect women, although the effects might not be as far-reaching and in some cases could even be beneficial. Some reform proposals require Social Security to extend the computation period for benefits from 35 years to 38 or 40 years. For women, with their lower rates of labor force participation giving them fewer years of taxable earnings than men, increasing the computation period would increase the number of zero years used in the calculation of benefits, lowering their average benefit. The Social Security Administration (SSA) forecasts that fewer than 30 percent of women retiring in 2020 will have 38 years of taxable earnings, compared with almost 60 percent of men. However, SSA has also calculated that the difference in additional benefit reductions for men and women would be relatively small: a 3.1-percent reduction for men compared with a 3.9-percent reduction for women if the computation period were 38 years, and a 5.2-percent reduction for men compared with a 6.4-percent reduction for women if the computation period were extended to 40 years. Another of the reform proposals includes a provision designed to improve the status of survivors, who are predominantly widows. This provision decreases the spousal benefit while a retired worker is alive (from 50 percent to 33 percent of the worker's benefit) and increases the survivor's benefit to 75 percent of the couple's combined benefit or 100 percent of the worker's benefit, whichever is greater. Another feature of this particular proposal, however, would change the benefit formula for retired workers in a way that would reduce the monthly benefit for most retired workers, disabled workers, spouses, survivors, and children. Thus, the net effect of these changes in spouse and survivor benefits will vary by individual circumstances. While mandatory savings accounts are intended to replace these lost benefits, it is not clear whose total benefits would be maintained and whose would increase or decrease. The effect of individual changes in the reform proposals could be relatively minor. However, several taken together could interact substantially. For example, cuts in spouse benefits and in the benefit formula, combined with increases in years of taxable earnings included in the computation period and increases in the normal retirement age, could potentially add up to a large effect on women relative to men. 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. Under current Social Security law, divorced spouses are entitled to a benefit based on the work record of their former spouse, if they are aged 62 or older, had been married at least 10 years, and have not remarried. Divorced survivors are entitled to a benefit based on the work record of their former spouse if they are aged 60 or older and had been married at least 10 years. Under several of the reform proposals that create mandatory savings accounts, divorced spouses and divorced survivors are not acknowledged as having any claim at all on the mandatory savings accumulated by their former spouse during the period of their marriage. Under these proposals, the current automatic provision of benefits would be eliminated. While this money may become part of the settlement upon divorce, it is not guaranteed under these proposals. To the degree that women are more risk averse than men, they might be less likely to take full advantage of the potential benefits from Social Security privatization. Some pension specialists believe that education is a critical factor in helping individuals make the most of their retirement investments. Preliminary evidence from a study of 401(k) participants suggests that people who are given information about their investment choices and potential returns are more likely to participate in a 401(k) and to contribute a higher proportion of their salaries than those who do not receive such information. However, few, if any, studies have examined how education affects the allocation decisions of 401(k) participants. Nevertheless, investor education that covers general investment principles and financial planning advice might help both men and women to better manage their investments. While employers have provided this type of education in the case of 401(k) accounts, it is not clear who the provider would be in the case of individual retirement savings accounts under a privatized Social Security system. A variety of policy options may help preserve the protective aspects of annuities, especially for women who are receiving dependent benefits. These range from mandatory annuitization of all individual accounts at retirement to partial annuitization, where some minimum level of annuity purchase is mandatory but the balance of an individual's account can be paid in a lump sum, to voluntary annuitization with some government regulation of the market, such as requiring the use of unisex life tables in calculating annuities. Mandatory annuitization simply means that the balance in each individual's account must be used to purchase an annuity at retirement. Because everyone is in the same risk pool for insurance purposes, the cost of annuities should be lower than if they were purchased individually, and monthly benefit levels should be higher for all annuitants. If annuities were also purchased under the auspices of the federal government, gender-neutral life tables could be used, so that men and women with the same account balance at retirement would receive the same monthly benefit from their annuity. In addition, by requiring married workers to purchase a joint and survivor annuity, unless a spouse signs a waiver, a mandatory annuity could protect women whose minimal work histories might make them ineligible for a retired-worker benefit of their own. Partial annuitization means that some portion of each individual's account balance would be used to purchase an annuity, but the rest of the money in the account could be paid out in a lump sum and spent as the individual wished. Partial annuitization might also lead to the use of gender-neutral life tables in the calculation of monthly benefits, leading to equal benefits for women and men with comparable lifetime earnings. And again, since all retirees would be in the same risk pool, the cost of an annuity would probably be lower than when purchased by an individual. The monthly benefits from these annuities would be lower than under a full annuitization plan, since they would not be using the entire account balance, but dependent spouses would still benefit from the protection of having some portion of their retirement income in the form of a joint and survivor annuity. Voluntary annuitization would leave the decision of whether to purchase an annuity, and what type of annuity to purchase, up to each individual. Under this plan, dependent spouses could lose the protection that a mandatory joint and survivor annuity would provide. Finally, under Social Security, the government ensures that men and women retiring at the same age with the same earnings history receive the same monthly benefits, despite the fact that women are expected to live longer and will therefore receive benefits over a longer period of time. The current approach provides equal living standards for equal contributions. If individual annuities were provided under gender-specific life tables, men and women with the same earnings history would receive different monthly benefits but equivalent expected lifetime benefits. The result would be that women's living standards would be lower than men's despite the same contributions. One option for mitigating this outcome is to use the same unisex life tables that are currently required for employer-provided group annuities for all annuitants.

Summary:
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. 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.