Academic journal article Social Security Bulletin

Changing Social Security Benefits to Reflect Child-Care Year

Academic journal article Social Security Bulletin

Changing Social Security Benefits to Reflect Child-Care Year

Article excerpt

In 1992, about 16 percent of women aged 65 and over were below the poverty line.(1) The problem of poverty focuses attention on women's Social Security benefits, because Social Security benefits are the most important source of income of the aged. It is well-known that women's monthly benefits are on average lower than men's. This reflects the lower lifetime earnings of women rather than any variation in treatment of men and women by program regulations. In part, these lower averages result from zero or reduced earnings in years when women take care of young children or disabled relatives. Removing the effect of dropping out of the work force to care for children is worth examining for adequacy reasons, as a possibility for reducing poverty among older women (1979 Advisory Council on Social Security; Kingson and O'Grady-LeShane 1993; Sandell and Iams 1994). Moreover, some advocates support this approach for equity reasons, arguing that society should not penalize women who perform unpaid work in the home raising children, by giving them lower Social Security benefits (American Association of Retired Persons (AARP) 1991; Older Women's League 1990).

Child-care proposals would increase retirement benefits for women who had no earnings or very low earnings when they raised young children. Two proposals receiving the most attention are adding a child-care dropout year exclusion to the retired-worker benefit formula and a child-care credit to the formula for calculating the special minimum benefit (SMB), a more generous Social Security benefit given to long-term workers with low earnings.

We review these proposals and assess their effects using an enhanced version of the 1990 Survey of Income and Program Participation (SIPP) file, which includes each respondent's Social Security Administration record of lifetime earnings. We conclude that both proposals have minimal effects and are not targeted to those women in the most economic need. Furthermore, the effect of full-time caregiving is cohort specific. Because most proposals would be implemented only for future retirees, we estimate the effects of these policies for women born in the 1930's and 1940's. More recent cohorts of working women have fewer years of full-time child care than earlier cohorts, which will diminish the impact of full-time caregiving adjustments to Social Security benefits in the long run.

Some of the public discussion implies that lower income women would benefit the most from excluding caregiving periods from the Social Security benefit computation (AARP 1991). This article examines the target efficiency of the child-care proposals in reducing poverty by estimating their effects for women categorized by economic and demographic characteristics. Income security and alleviating poverty of older citizens are the founding principles for the Social Security Program. Thus, a minimal justification would require that the expenditures from the proposals increase the incomes of poor women more than the incomes of those who are not poor. One's judgment of the proposals should depend in part on who benefits from them. By estimating the dollar impact on benefits from these proposals, we assess their target efficiency.

Women's Retirement Benefit Calculation

Social Security retired-worker benefits usually are based on the 35 years of highest earnings from age 22 through age 61, after dropping the 5 lowest years (see Social Security Administration 1993b for details). Any years where earnings were higher before reaching age 22 or after reaching age 61 may be substituted. Earnings are wage indexed through age 60, and an average indexed monthly earnings (AIME) is calculated. The wage indexing is used to convert earnings from specific calendar years to a single basis before calculating initial retirement benefits. The basic benefit is calculated giving proportionately more benefits to persons with lower earnings. In 1992, the basic monthly benefit--the primary insurance amount (PIA)--was calculated using 90 percent of the first $387 in AIME, 32 percent of the next $1,946, and 15 percent of the AIME over $2,333. …

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