Social Security Reform

On average, Social Security pays lower retirement benefits to women than to men, primarily because women tend to have lower lifetime earnings. Social Security reforms that would create individual private savings accounts and change the way that benefits are distributed would exacerbate the difference in retirement benefits between men and women. Working women earn less than men, on average, and would have less money to invest in their individual accounts. Also, women are often more cautious investors than men and may be less likely to invest in potentially higher yielding, though riskier, assets such as stocks, a tendency that puts them at risk of accumulating relatively less money in their accounts at retirement. Moreover, 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 because it is adjusted for their greater longevity.

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.