Here’s something I learned from Jim Blankenship’s book A Social Security Owner’s Manual: Social Security is overly generous to one-earner families and penalizes two-earner families. Of course Jim didn’t say it directly in the book. I reached this conclusion based on the information I learned from the book.
When Social Security first started in the 1930s, one-earner families were the norm. Husband worked; wife stayed at home. Now, two-earner families are the norm: both husband and wife work full time. It’s been this way for many years, but Social Security rules stayed behind. They are still operating in the world as if one-earner families are the norm.
Consider two couples. Couple One is the traditional one-earner family. Husband worked; wife didn’t. They both reached their full retirement age at 66 this year. After indexing for wage increases and inflation, the husband’s average earnings over the highest 35 years is $48,000 a year.
Couple Two is the now-usual two-earner family. Both worked full time. Husband earned a little more due to gender wage gap; wife earned a little less. They also both reached their full retirement age at 66 this year. After indexing for wage increases and inflation, the husband’s average earnings over the highest 35 years is $25,200 a year; the wife’s is $22,800 a year.
When we add the income from both husband and wife, Couple One and Couple Two had identical income: $48,000 a year. When they filed their taxes jointly, both couples paid the same amount of income taxes. Because their incomes have been below the Social Security wage base ($106,800 in 2011), the two couples also paid the same amount of payroll tax for Social Security and Medicare.
Although both couples had identical income before and after taxes, Couple One had a better life. The husband’s higher-wage jobs had a better work environment and used more knowledge skills than physical labor. Couple One didn’t have to spend as much on daycare and after school programs because the wife had more time to take care of their children. Their children had better grades because mom had more time to help. They ate more healthily and their homes were better taken care of because the wife had more time at home. They didn’t spend as much on work clothes or commute.
Even Social Security treats Couple One better when they reached retirement age. In Social Security lingo, the husband in Couple One has an Average Indexed Monthly Earnings (AIME) of $4,000 a month. After applying the Social Security benefits formula, the husband’s Primary Insurance Amount (PIA) is $1,812 a month. His wife gets 1/2 of the his PIA. That’s $906 a month. Together, Couple One receives $2,718 a month from Social Security.
For Couple Two, the husband’s AIME is $2,100 a month; the wife’s AIME is $1,900 a month. Their PIA are $1,154 a month and $1,084 a month respectively. Together, Couple Two receives $2,238 a month. Social Security pays Couple One $480 a month or 21% more than it pays Couple Two, even though they had identical income and paid identical amount of taxes, and Couple Two had smaller personal savings due to higher expenses on child care, education, commute, etc.
The gap only grows larger after one spouse dies. If the wife dies first, the husband in Couple One continues to receive his PIA of $1,812 a month. If the wife dies first, the husband in Couple Two continues to receive his PIA of $1,154 a month. Now the difference between what the two families receive from Social Security has increased from $480 a month to $658 a month. Social Security pays the surviving spouse in Couple One 57% more than it pays the surviving spouse in Couple Two.
If the husband in Couple One dies first, his wife receives 100% of his PIA as survivor benefits. That’s $1,812 a month. If the husband in Couple Two dies first, his wife receives 100% of his PIA ($1,154 a month) as survivor benefits because it’s a little higher than her own PIA. The difference in Social Security benefits received by Couple One and Couple Two increases from $480 a month to $658 a month. Social Security pays the surviving spouse in Couple One 57% more than it pays the surviving spouse in Couple Two.
|AIME||PIA||Wife Dies||Husband Dies|
Our one-earner family is favored left and right compared with the two-earner family with an identical household income. They accumulate more savings when they worked, due to lower expenses on child care, education, and many other things. They receive higher Social Security benefits when they retire. When one spouse dies, Social Security favors them yet again.
Is there a good policy reason that one-earner families must be favored over two-earner families? I don’t see any. The only reason I can think of is that the rules were set when one-earner families were the norm. Nobody bothered to think about two-earner families because there were so rare. Once the rules were set, they became entrenched. Nobody dared to touch the third rail.
Social Security benefits are overly generous to one-earner families. When Social Security is facing funding problems, this would be a good area for reform. Treat each person as an individual. Let their benefits be driven by their own earnings record. Get rid of the spousal benefits. When one spouse dies, reduce the benefits to one half of what the couple used to receive. That’s pretty much how a two-earner family would be treated. Make it consistent for one-earner families as well.
Removing the spousal benefit will also practically end the game people play with how they claim the benefits such as file-and-suspend. When Social Security faces funding problems, we can’t afford these games.