1. Social Security Spouse and Survivor Benefits for the Modern American Family Melissa M. Favreault and C. Eugene Steuerle The Urban Institute August 10, 2006

2. What is Earnings Sharing? Combine spouses’ earnings records for duration of marriage when calculating OASDI benefits Marriage as partnership Usually remove spouse/survivor benefits in tandem with this

3. Current Law Spouse is entitled to higher of half a worker benefit or own benefit Survivor benefit = 100% worker benefit Divorced people qualify with a minimum of 10 years of marriage

4. Concerns with Current Law Equity: Couples with even earnings can receive far lower benefits than couples with dissimilar earnings paying the same payroll taxes Amount to over $100,000 over a lifetime Couples with similar earnings have steeper drops at widowhood

5. Concerns with Current Law Efficiency: Poor work incentives Marriage / divorce penalties/bonuses Adequacy: Spousal/survivor transfers depend on worker earnings, not need Substantial levels of aged poverty, especially among unmarried women

6. How Large are these Concerns? Equity: problem reduced in recent years, but still sizable About 20% of adult benefits are auxiliary Adequacy: Need remains for aged women 12% poor and 20% near poor (vs. 7% and 12% for men) Unmarried women especially vulnerable (17% poor vs. 4% among married)

7. Non-Contributory Benefits are about 20 Percent of Adult OASDI Benefits 2004 Source: Tables 5.A16 and 5.G3 from Social Security Administration (2006a); 2030 Source: DYNASIM 20%11%

8. Social changes About half marriages end in divorce More than half of those that end do so before the 10 year point (median of 7) Households without a married couple will soon be the majority Single-earners are a minority for couples Over a quarter of wives out-earn husbands Males withdrawing from labor force A third of children born outside of marriage

9. Some Criteria for Change Equity: Provide more equal lifetime benefits to couples paying the same payroll tax Efficiency: Ensure that increased earnings lead to increased benefits Avoid marriage penalties/divorce bonuses Adequacy: Reduce poverty / near poverty

10. Incremental changes can improve adequacy, equity Caregiver credits Herd (2006); Iams and Sandell (1994) Minimum benefits Herd (2005); Favreault, Mermin and Steuerle (2006); Favreault, Sammartino and Steuerle (2002) Spouse-survivor tradeoffs Burkhauser and Smeeding (1994); Hurd and Wise (1997); Sandell and Iams (1997); Favreault, Sammartino and Steuerle (2002)

11. We use DYNASIM to Simulate: Three versions of earnings sharing All are on the “draconian” side relative to versions from the 1980s Two incremental changes Minimum benefits Caregiver credits All cost about the same amount in 2050

12. Earnings Sharing Options Simulated Survivor benefitRecaptured $ 1Maximum shared earnings history 2.7% benefit increase 2None4.5% benefit increase 3Self-financed with lower benefits earlier 4.5% benefit increase All 3 share earnings, eliminate spouse benefits

13. Incremental Options Simulated Survivor benefitCost Offset 1Minimum benefit of 100% poverty at 40 work years; wage- indexed Reduce spouse benefit to 12.5% 2Caregiver credit of ½ average for up to 5 years (7 years if >1 child) Eliminate spouse benefit

14. “Winners” Vary Greatly across Options Earnings Sharing (ES) Divorced women win Sizable fractions of married people Minimum Never married and divorced win, with divorce gains less than under ES Caregiver In general, sizes of gains more modest

15. Losers Vary Greatly across Options A cost-neutral framework inevitably generates losers Earnings sharing: Divorced men, some married people, widow(er)s Minimum benefit Fewest people with changes Because of financing, married single-earners Caregiver credits Married people (again, most single-earners)

16. Equity Increases under all 5 Options Difference in Lifetime Benefit-Tax Ratios for Single Earner vs. More Equal Earners for Low Lifetime Tax Group Source: Authors’ calculations from DYNASIM

17. Equity Increases Differ for Higher and Moderate Earners Difference in Lifetime Benefit-Tax Ratios for Single Earner vs. More Equal Earners in Same Lifetime Tax Group Source: Authors’ calculations from DYNASIM Med Hi Med Hi Med Hi Med Hi

18. Poverty Declines in 4 of the 5 Options Source: Authors’ calculations from DYNASIM Change in 2049 poverty (1,000s)

19. Conclusions and Caveats Simulations are stylized, but suggest that… Well-constructed earnings sharing can address inequities, low returns to work at older ages, and potentially poverty Other options (minimums, caregiver) can do as well (better) on poverty, but not as well on equity, work incentives Gains and losses more modest, especially with caregiver credits

20. Policy Implications / Next steps There are clear ways that we could improve the system’s performance Careful attention to design features can mitigate some of the less desirable effects Next steps: Combining earnings sharing with other features (minimums, formula adjustments)