Academic journal article Social Security Bulletin

The Sensitivity of Proposed Social Security Benefit Formula Changes to Lifetime Earnings Definitions

Academic journal article Social Security Bulletin

The Sensitivity of Proposed Social Security Benefit Formula Changes to Lifetime Earnings Definitions

Article excerpt

Several Social Security proposals have included benefit formula changes that apply to earners above a specified percentage of the combined male and female (unisex) lifetime earnings distribution. The unisex distribution is an average of two disparate groups with large lifetime differences in labor market participation. This study finds that if Social Security's median unisex average indexed monthly earnings (AIME) amount is used to define an earnings threshold below which benefits will be held roughly unreduced, the percentage of fully insured men subject to benefit reductions (70 percent) exceeds the unisex estimate of the population subject to benefit reductions (50 percent) by 20 percentage points. If policymakers wish to adjust future benefits and focus benefit reductions on middle or high primary or full-time wage earners in a household, the male, rather than unisex, AIME would come closer to achieving such a goal.

Introduction

Several Social Security proposals have included benefit formula changes that apply to earners above a specified percentage of the combined male and female (unisex) lifetime earnings distribution. Because this unisex distribution is an average of two disparate groups with large lifetime differences in labor market participation, the definition of a "high, middle, or low earner" derived from such an average can be difficult to interpret. For example, while women with historically low labor force participation and hours worked may have low lifetime earnings, they may not have low household income if they are married to a man with a lifetime of full-time employment at a high wage. When such women are averaged into a combined earnings distribution, the workers who are defined as high, middle, and low earners will differ from the workers who would have been so defined under a definition based on the earnings of the primary wage earner in a household. In other words, a man working full time at a low wage (as measured against other full-time workers) could be classified as a "middle lifetime earner" by virtue of the fact that his total number of years and hours worked is much larger than that of his female counterpart. His female counterpart, on the other hand, could be classified as a "low lifetime earner" even though her low lifetime earnings may be due to years of zero earnings in nonmarket work such as childcare (during which her spouse participated full time in the labor force), rather than actually being a low-wage earner at an equivalent full-time job to that of her male middle-lifetime-earner counterpart. In terms of lifetime income, the female "low earner" could be wealthier than the male "middle earner."

This study finds that if the median unisex average indexed monthly earnings (AIME) amount is used to define an earnings threshold below which benefits would be held roughly unreduced, approximately 70 percent of male workers newly eligible for retired-worker benefits in 2007 would have had their benefits reduced. The percentage of fully insured males subject to benefit reductions exceeded the unisex estimate of the population subject to benefit reductions (50 percent) by 20 percentage points. This result is driven by large differences in the number of lifetime hours worked and therefore lifetime earnings between men and women for birth cohorts that have recently reached age 61. In 2007, for example, while 46 percent of men would have had some earnings replaced at the current-law top primary insurance amount (PIA) factor of 15 percent, only 10 percent of women would have had any earnings replaced at the top bend point factor. A difference of 36 percentage points by sex at the top bend point implies that statistics reported at the unisex level have the potential to be misunderstood.

Some policymakers or analysts, for example, may have a goal of adjusting future benefit levels and may be interested in the effects of those adjustments at different levels of the earnings distribution. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.