How Uniformity Deals with Diversity: Does One Size Fit All?

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Mr. Chairman, distinguished members of the committee,colleagues: Thank you for the opportunity to appear before thiscommittee to address Social Security's impact on different types ofworkers.

I love the title of this hearing "How Uniformity Deals withDiversity: Does One Size Fit All?" because it painted for me a veryfunny scenario the minute I heard it. I pictured my 10-year-oldsister, she's about this big and weighs about 60 pounds, putting onmy older brother's suit coat. Now my older brother is 6 foot 6inches and weighs about 180 pounds. And I can tell you howuniformity deals with diversity when it comes to clothing.

On a serious note, in one fairly important sense, the currentSocial Security system treats everyone equally because it giveseveryone, every worker-no matter what their income, their ancestry,their gender-an inexcusably meager return on a lifetime of payrolltax contributions. Clearly, that's the most important thing toremember when we decide what the nation's future retirement systemshould look like. Substandard returns, whether shared equally orunequally across different populations, are nothing to be proudof.

That said, I have spent a good deal of time studying the impactof the current system on women. The bottom line is that whileSocial Security does not differentiate between women and men, itsimpact on men and women is quite different.

  • Because women generally work fewer years and earn less than mendo, they receive lower benefits from Social Security than men do:the average woman's benefit is little more than $600 per month, theaverage man's benefit is more than $800.
  • The result of those lower benefits is higher poverty rates:poverty rates are twice as high among elderly women as amongelderly men: 14 percent compared to 6 percent.
  • A third problem is that according to the Social SecurityAdministration, 25 percent of women pay into the Social Securitysystem and get back nothing, not a penny, in return. This is theresult of something called the dual entitlement rule, which says awoman can collect benefits based on her own work record or based onher status as a spouse-but she cannot collect both. She can onlycollect the larger of the two. For 25 percent of women, theirbenefit as spouses are larger than their benefits as workers.Therefore, while a woman might receive a larger check as a spousethan she would have based on her own work record, she has stillpaid payroll taxes for which she gets nothing. This means that awife who never enters the workforce or pays a dime in SocialSecurity taxes can, under Social Security, collect the same monthlybenefit as a single woman who spent her entire adult life in theworkforce.

Supporters of the dual entitlement rule believe this isacceptable because women end up with larger benefits than theywould have based on their own work records. The truth is that ifCongress would allow women to deposit their payroll taxes intopersonal retirement accounts, they wouldn't need that preference.Every dollar they earned would work for them and every dollar wouldincrease their retirement incomes. Couples could also choose toshare their earnings, which would further increase retirementfunds. I've attached a study we published at the Cato Institute,which shows just how much better off women would be if they wereallowed to enter a new system of individually owned retirementaccounts.

Consider the most difficult scenario: a single woman earning$12,000 a year, roughly the minimum wage. She pays $1,488 per yearin Social Security taxes. When she retires, Social Securitypromises her $683 per month (assuming solvency). If she wereallowed to save and invest her money in a portfolio of stocks andbonds earning a 6.2 percent return, she would retire with $936 permonth. Those conservatively estimated benefits are roughly 30percent greater than what she could expect from SocialSecurity.

So, Mr. Chairman, as you know, despite the fact that SocialSecurity's rules have been written to try to minimize inequality ofoutcomes, significant differences in outcomes remain. But if wefocus on those technical defects, we'd be missing the big picture,which is that Social Security isn't a very good deal for anyworker.

  • There are different outcomes for different subgroups of women.Take poverty rates, for example. The poverty rate for women whohave never married is 20 percent compared to 5 percent for marriedwomen.
  • There are also different outcomes for different subgroups ofmen. For example, because the average African-American male canexpect to die almost 2 years earlier than the average Caucasianmale, the average African-American male receives 24 fewer paymentsfrom Social Security than the average Caucasian male.
  • Most workers born around 1960, regardless of gender, maritalstatus, ancestry, or income, can expect rates of return on theirpayroll tax contributions between 1 and 2 percent.
  • A male born two decades later can expect to pay $182,000 morein Social Security taxes than he will receive in benefits.

So while married women may fare better than single women,Caucasian men may fare better than African-American men, and menmay generally be said to fare better than women under SocialSecurity, no group fares well.

The most important thing for this task force, this committee,this congress to consider is that a redesigned system that is basedon individually owned accounts, can significantly increase theretirement incomes of all workers no matter what their income,their ancestry, or their gender might be. That is how a system ofpersonal retirement accounts will deal with diversity.

Darcy Ann Olsen

Committee on the Budger
United States House of Representatives