Social Security's War On Working Wives

We've heard a great deal about the "war on women" lately, mostly in connection with hot-button issues like abortion and birth control. But beyond all this rhetoric, there is in fact a large program whose design reflects antiquated, sexist thinking about women.

It's called Social Security.

Social Security's spousal and survivor benefit provisions - which date back to 1939 - make the program a terrific deal for spouses who stay out of the labor force. As such, they are unfair to the growing number of two-earner families, and they discourage married women from working outside the home. We will soon need to undertake serious reforms to keep Social Security solvent. Redesigning the program to reflect the changing role of women could be a rare opportunity for bipartisan agreement.

Here's how the system works. Single people pay payroll taxes and collect benefits based on their own earnings. Married people pay payroll taxes based on their own earnings and can collect either a spousal benefit or a benefit based on their own earnings (whichever is higher); they can also choose to switch to a survivor benefit if they are widowed. Thus, a non-earning spouse who pays no payroll taxes can still claim Social Security benefits based on the earning spouse's work history.

As a result of this design, one-earner couples get a much higher rate of return on their Social Security contributions than two-earner couples and singles. The Social Security Administration estimates that a two-earner couple or single person - born in 1949 and with average earnings - can expect to receive an inflation-adjusted rate-of-return in the 2-2.5 percent range. (In other words, if these workers' contributions earned a 2-2.5 percent inflation-adjusted annual return, it would be just sufficient to pay their benefits.) In contrast, a one-earner couple with an average-earning husband receives an inflation-adjusted rate-of-return of more than 4.5 percent. This disparity occurs because the non-working spouse in a one-earner couple receives a benefit without paying any payroll tax.

This design also creates economic inefficiency by discouraging married women from working. For those who expect to claim a Social Security benefit on their own record, the payroll tax can be viewed as a contribution that buys them higher future benefits. Thus, it doesn't discourage work as much as an income tax, which lowers the reward from working today without providing future benefits. But people who expect to claim spousal benefits (typically married women) can't increase their Social Security benefits by working and paying the payroll tax - they will get their spousal benefits regardless of whether they work. For these individuals, the payroll tax discourages work just like an income tax. And this effect is likely to be substantial: there's a great deal of economic research showing that married women are quite responsive to taxes.

To be sure, there's nothing wrong with married women choosing to stay home. But it's a problem when the government tilts the playing field in favor of this choice.

Social Security's design may have seemed natural in the early days of the program, when the typical family had a single (generally male) breadwinner. Indeed, in 1940, less than 20 percent of married women participated in the labor force. But our society has changed dramatically since those days. The labor force participation rate of married women has risen considerably, to 40.5 in 1970 and 61.0 percent in 2010. Not surprisingly, therefore, two-earner couples now outnumber one-earner couples.

A number of reforms are possible to catch Social Security up to present-day social realities. For example, we could reduce or eliminate spousal benefits, at least for high-income families. Alternatively, we could replace the spousal benefit with "earnings-sharing," which would divide a couple's earnings equally between them for the purposes of computing Social Security benefits. Indeed, in a recent study, Melissa Favreault and Eugene Steuerle of the Urban Institute find that implementing reforms like these would reduce disparities between one- and two-earner couples.

Such proposals are worth serious consideration. In the near future, we will need to take steps to address Social Security's financial shortfall. While we're at it, let's also bring Social Security out of the dark ages and get it to reflect the reality of today's two-earner families.