Friday, October 12, 2007

GAO Report on Women's Retirement Challenge

On October 11, 2007, the U.S. Government Accountability Office issued a report entitled "Retirement Security: Women Face Challenges in Ensuring Financial Security in Retirement", GAO-08-105 (PDF, 85 pages), dated October, 2007. It was delivered to the U.S. Senate's Special Committee on Aging, chaired by Senator Herb Kohl (D-WI).

The GAO's transmittal letter, dated October 11, 2007, to the Ranking Member of that Committee, Senator Gordon Smith (R-OR), expressed the need for such a study, in conjunction with the evolution of the federal systems of social security, Medicare, & Medicaid, and the private systems of pensions & health care:
Over the next 40 years women aged 65 and over will account for a growing segment of the U.S. population. In 2000, there were about 20 million women aged 65 and over, more than 7 percent of the U.S. population; by 2050 that number is estimated to grow by nearly 28 million to about 12 percent of the population.

Elderly women have persistently high rates of poverty, and the major source of income for many retired women is Social Security. However, the Social Security system is affected by the decrease in the rate of growth of the working age population. Under current law, the Social Security Trustees project that by 2041 the Social Security Trust Funds could be insufficient to pay full benefits.

Demographics as well as rising health care costs are profoundly affecting not only the Social Security system, but also Medicare, private pension and health benefits, and personal savings in ways that will likely present serious challenges to ensuring financial security for future retirees and, ultimately, the economic security of the nation.

In recent years, many proposed reforms of the Social Security system have focused on long-term solvency and financing issues, many of which could result in decreased benefits for individuals.

Alternatively, some Social Security proposals developed over the past several decades include elements that seek to modify the program and address its limitations when applied to nontraditional-family or earnings structures. These limitations may be due both to the evolving nature of families and to changes in women’s laborforce participation that have emerged since Social Security’s creation. These elements often address the needs of two-earner families as well as retirement benefits after divorce.

Additionally, recent and ongoing changes in employer-sponsored pension plans, most notably the shift from defined benefit pension plans to defined contribution plans, may complement changes in workforce patterns, but also place greater responsibility for prudent savings and investment decisions on workers.

Given the existing differences in men’s and women’s incomes, and the changes in women’s workforce behavior in the later half of the 20th century, any future changes to Social Security as well as both proposed and ongoing changes to employer-provided pensions could have different impacts on women and men. It is important to understand how each will fare under various proposals.
To address these concerns, the
posted Summary of the Report noted the task, the input, and the conclusion:
GAO was asked to examine (1) how women's retirement income compares with men's and the reasons for differences; (2) how certain life events such as divorce, widowhood, and workforce interruptions affect women's retirement income; and (3) the possible effect on women's retirement income of certain changes to Social Security and pensions that seek to mitigate the effects of differences in workforce participation patterns.

To address these objectives, GAO reviewed the relevant literature, interviewed academics and other retirement experts, and used a microsimulation model to project future retirement income. GAO provided a draft of this report to the departments of Labor and Treasury, the Internal Revenue Service, and the Social Security Administration. Cognizant agency officials provided technical comments which were incorporated as appropriate.

GAO is making no recommendations.
The Report identified key demographic, economic, and historical trends that result in women having less retirement security than men, overall. This is the Summary's short-form presentation of findings:

In general, women have less retirement income than men, largely because of women's lower labor force attachment and lower earnings, on average. Fewer women than men have income from most major retirement sources, and women have less income from these sources.

Women's median Social Security income is 70 percent of men's. Also, fewer women than men have pensions. Among the population age 65 and over who continue to work, women earn just over half of what men earn. Women also have somewhat smaller income than men from assets, such as interest and dividends.

Accordingly, rates of poverty among those 65 and over are substantially higher for women than for men. Although their participation has increased substantially in the last century, women still spend fewer years in the labor force than men, and they more often work part-time. Also, women tend to earn less than men, despite increases in their wages over time relative to men. Although work patterns are key in earnings differences, in prior work, we found that even after accounting for behavioral differences such as education or labor force participation, women still earn less than men.

Certain life events -- including changes in marital status, labor force interruptions, and long-term care needs -- can significantly reduce the amount of pension income and Social Security benefits women receive -- and leave women with fewer financial resources at retirement than men. Social Security divorced spousal benefits are available only if the marriage lasted at least 10 years. Furthermore, pension benefits are available to a divorced spouse only under certain circumstances. Women's role as primary family caregiver for children and elderly relatives can reduce their career earnings, on which retirement income is based.

Because women tend to live longer than men, widowhood and costly long-term care assistance may further reduce their retirement resources. GAO's simulations of some Social Security changes that would compensate for low earnings or time out of the workforce showed that those changes tend to increase benefits for beneficiaries overall, and particularly those in lower income quintiles.

Alternatively, changes that focus on shifts in family structure, such as increases in two-earner couples and increased incidence of divorce, tend to increase the benefits of groups targeted by the change, but produce mixed results for others.

Some pension changes that have been proposed in the past several years take into account the changing labor force and norms of employer-provided retirement plans; while these changes are gender-neutral, they may provide important new opportunities for women to increase their retirement income. For example, decreased vesting requirements may provide additional pension income to those with intermittent workforce participation who would not qualify for pension benefits under a longer vesting schedule.

The GAO Report appears to confirm the findings of other studies or surveys conducted in 2004 & 2005. Based on those findings, financial commentators or advocates have offered more personal advice for women:

That last article concluded: "Unfortunately, in assessing their needs for retirement, women may not be taking into consideration the additional challenges they face when it comes to saving."