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.
In summary:
| AIME | PIA | Wife Dies | Husband Dies | |
| Couple One | ||||
| Husband | $4,000 | $1,812 | $1,812 | $0 |
| Wife | $0 | $906 | $0 | $1,812 |
| Total | $4,000 | $2,718 | $1,812 | $1,812 |
| Couple Two | ||||
| Husband | $2,100 | $1,154 | $1,154 | $0 |
| Wife | $1,900 | $1,084 | $0 | $1,154 |
| Total | $4,000 | $2,238 | $1,154 | $1,154 |
| $ Difference | $0 | $480 | $658 | $658 |
| % Difference | 0% | 21% | 57% | 57% |
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.
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KD says
Great article! Great analysis!
Jay says
I know you are just focusing on social security … but since you opened the door to the “spouse working or staying home with the kids” dilemma , perhaps an article on how our tax system allows two wage earners to deduct child care costs, but provides no corresponding tax benefit to the spouse who chooses to provide that child care themselves … at the significant “child care cost” of lost income.
Perhaps the SS benefit you discuss should be left as is.
Michelle Truman says
Agreed! We should be incenting better environments for raising children, such as one parent staying home. Why encourage the madness??
Harry Sit says
@Jay – As you must know, a tax deduction on a cost incurred is worth much less than the cost itself. Compare Couple One and Couple Two in this post when they are raising their kids. Say Couple Two pays $5,000 a year in child care expenses. They get a tax deduction perhaps worth $1,000. They are still out $4,000. With the same combined income, Couple One is much better off with not having that deduction.
David says
I think the better solution is to increase the two-earner benefits to match the one-earner benefits. The financial problems in SS are much less than the pundits make out. With a 75 time horizon, even minor changes now can have a very big effect on the end result. Meanwhile, something like 3/4 of retired families rely almost exclusively on SS benefits. They aren’t rich, let me tell you. Reducing benefits would cause way more human suffering than the alternatives.
Harry Sit says
@David – With the Social Security funding problems, whether they are more or less than the pundits make out, the future generations will already receive a smaller benefit relative to the current and previous generations. Increasing the two-earner benefits will only tilt it even more toward the current generation at the expense of the future generations because the future generations will pay for it and the current generation of recipients will benefit from it and not pay for it.
White Coat Investor says
I wrote an article about the pointlessness of having my wife (a teacher) go back to work recently. After additional costs (especially the fact that the additional income would be taxed at my physician tax rate), she would be making something like $2 an hour. This just further confirms the financial aspects of our decision for her to stay home for now.
http://whitecoatinvestor.com/the-hidden-costs-of-a-dual-income-household/
Ace says
You asked if there is a good policy reason that one-earner families be favored over two-earner families. You gave the policy reason in your article: “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.”
I realize this may be politically incorrect and “old-fashioned,” but remember that once upon a time our tax and welfare laws weren’t just created to redistribute wealth and try to narrow the gap between rich and poor. Once upon a time they were also created to promote positive social policies, reward “good’ behavior, and deter “bad” behavior. The mortgage and charitable deductions were put into place because home ownership and supporting charity is “good.” Tuition credits and deductions are there because education is “good.” Cigarette taxes exist because smoking is “bad.”
Statistics show (and you state in your post) that children do better and families are stronger when one parent (either parent) stays home full-time. I realize this is always possible, but I do think it is something our society should aspire to and promote as “good.” The existing social security system you outline promotes this policy, and also recognizes that stay-at-home moms and dads provide invaluable service to their families and communities, even though they don’t get a paycheck that plugs into the social security formula.
Michelle Truman says
Sorry i did not read your comment before i posted. I could NOT agree more. What behavior are we trying to promote with policy? The madness of the two earner family or the peace and order when one parent stays home? I do not care which parent, but it makes a bit difference in quality of life and most likely in support services required to families (think health benefits alone from eating home cooked meals).
Queued says
Hi Ace. When government treats different living situations differently, an incentive is often created to live the way that gets greater benefit. The people living the non-incentivized way “pay more” towards those living the incentivized way.
I agree that if a government creates such an incentive, the incentive should be toward pro-social behavior (esp. one that helps families). But if that incentive is only accessible by the rich, then the poor pay more of their share to help the rich because they cannot reach the threshold (live on one income) to get that benefit. As this social security benefit also goes to rich one-earner couples without kids, it is more accurate to say this helps spouses in wealthy couples not work.
Given the author’s example of two families, can Family 2 survive on $25200? Maybe. But it may be the case that the second salary is needed RIGHT NOW. A more direct and wealth-neutral government benefit to promote family time could be government-funded parental leave that pays the parent a flat amount, not based on salary: so a parent working at a $70k job or one working at a $22k job could take leave to be with their kids and get the same benefits.
Rabbmd says
The one benefit to two working families is the ability of both to deduct $16,500 this year under 50 to deferred comp plans like 401ks, 403bs. That is the one benefit my wife quit her job a couple years ago in a very similar situation to the one whitecoat described.
Biff says
Yes, but that only applies to those working at jobs that offer such perks AND offer a salary big enough to defer that much money. It is another government benefit favoring those fortunate enough to have such a job. From the example, Couple 2 would probably not be deferring a combined $33k per year into their 401ks.
Andrew says
“Removing the spousal benefit will also practically end the game people play with how they claim the benefits such as file-and-suspend.”
I definitely agree that this fix would end some of the games people play and we absolutely need to make some fixes to Social Security.
But there is a problem with treating each person as an individual and letting their benefits be driven by their own earning record. With the high divorce rates, what happens if the divorcee has a low earning record because he/she stayed at home with the kids. Your solution is fine and fair if the couple were still married and they have both social security benefits to draw from, but would be unfair to the stay-at home spouse if they eventually divorces the sole wage earner
Harry Sit says
Divorce settlement will take care of that. Each person has an earnings history. At the time of divorce, a percentage of one’s earnings history during the time of marriage can be assigned to another person. Canada does it this way. It’s working.
Lisa says
I always knew about the inequality problem with a single income family paying the same tax as a dual income family but enjoy much higher quality of life, but hey, taxes are never fair, someone in Austin vs someone in New York with the same income is going to have very different standard of living. However, this SS difference is far larger than I imagined and mothers don’t consider this when deciding whether to return to work. The government is basically saying mothers who earn less than $40k shouldn’t bother stepping outside their house. Might as well make all women pay out of state tuition while we’re encouraging “traditional family value”. The US system is so broken.
Ace, if we really want to “recognizes that stay-at-home moms and dads provide invaluable service to their families” then maybe we should make them pay tax on that contribution? After all, I have to pay for cooking and house cleaning with after tax money (plus sales tax) if I want to achieve the lifestyle of a single income family.
MURV says
Even worse is the case of a family with one 48k income and one 15k income. No benefit at all for the lower income but still have to pay all the SS taxes
Steve says
Re: Lisa (6 December 2011)
Your comment about taxing stay-at-home moms and dads really has me baffled.
Taxes are implemented by the government for two base reasons: 1) to generate additional revenue (without having to actually create anything); 2) To modify people’s behavior by making them pay to participate in an activity frowned upon by the government.
So, which way were you going with your comment… just more money to be forcibly taken from us, by the gov’t… or do you disagree with the notion of one parent being present in the home, to raise the children? A notion, by the way, which has proven rather effective for a pretty long time (at least a couple of hundred years)…
ND says
I see no reason for taxpayers to subsidize sole-breadwinners. There is lots of evidence that children do best in homes where both parents work for pay and both parents do the unpaid work of family life, child care, parenting etc. Some 2-earner/2-parent families do this with no outside child care (working 30-hour weeks for example, on staggered schedules), or if they do childcare, it is paid for by the parent outsourcing his/her share of the care.
I think that Social Security and Medicare should be made neutral as to family structure.
I also think the income tax code in general should be made individual and not joint filing. Children can be claimed half on each parent.
We need a progressive federal income tax code, though, because property and sales taxes are regressive by their nature.
FB says
Hi ND,
Just curious, how are property taxes regressive? I know how sales taxes are.
Cheers,
FB
ND says
There is a study that the OSS did on a “shared earnings model” in Social Security, which would make it neutral as to family structure for the retirement benefits. http://www.ssa.gov/policy/docs/ssb/v69n1/v69n1p1.html
It did not look at the survivor benefits, which are another issue altogether, though, that needs to be made neutral as to family structure.
Harry Sit says
ND – Thank you for pointing out the study. The scenario P2 in the study looks good to me. It takes care of the survivor benefits. This shows they know the problem and how to solve it. They just lack the political will to touch the status quo. As a result, more affluent one-earner families continue to benefit over less well-off two-earner families.
Tony Naples says
The comparison is not the same. Generally the same would be for a family with two earners versus one earner with same education and earning ability. The one earner couple loses the added income. They don’t gain anything. In other words your two -earner couple should have one spouse making $48K same as one eanrer couple plus the second spouse earning ?? $36K. Now you have the more realistic situation. In this case the two-earner couple must pay for child care and other expenses, but the govt (one earner couple) subsidizes by offering credits for child care.
The fact remains that stay at home spouses do work that is essentially unpaid. Child care is working. Cooking and cleaning are working. All three activities are unpaid positions in one-earner family.
The problem can be viewed from a variety of lenses. At the end of the day the system no matter how hard we try will never be completely equal. Is it unfair? I can’t answer that question. Families, parents, spouses and single people who choose not to get married all make lifestyle choices.Expecting the tax code to effectively deal with those choices in a changing society is unrealistic. Add in the cost of health care, how health care is dleivered and the issues of medicare and now the problem is much more complex.
FB says
Hey Tony,
The comparison the author made is the same. I know poorer families with 2 job-holders and earn about the same as families with 1 job-holder. They are poorer because the second job comes with financial and opportunity costs. The government should not benefit the wealthier family in this scenario. If you compare families earning different amounts annually, it is fair that their taxes and soc sec benefits be different. But in this scenario, the taxes are the same between the families and the soc sec benefits favor the wealthy family.
“Is it unfair?” Sure it is. We can make taxes progressive, regressive, or favor any number of lifestyles, we just have to target the group we want to benefit carefully. The tax code is full of exemptions and treats all kinds of income/expenses differently; this creates tons of broad and narrow incentives.
“All three activities are unpaid positions in one-earner family.” Sure, and the fact that Family 1 doesn’t have to pay a third-party for them AND doesn’t pay taxes on the fruits of the spouse’s labor mean that Family 1 has a better living standard.
Michelle Truman says
Is there a good policy reason that one-earner families must be favored over two-earner families?
Yes, it appears earlier in your article.
“Couple One had a better life…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.”
Policy should encourage favored behavior. Couple One will raise children who are less stressed and better able to cope with the world at hand. Couple Two is NOT the desired model. It’s just where we end up because of a lot of other terrible policy.
Harry Sit says
If you are already better off, you shouldn’t be able to double dip. The rich getting richer and all that …
FB says
I agree with Harry.
This government benefit is only going to married couples who meet a financial threshold: those wealthy enough to live on one income.
Michelle, while this soc sec rule may help some families with kids, it has 2 problems I think we can all agree upon.
1) The threshold to get the benefit is anti-poor.
2) The benefit is so broad that it helps wealthy couples with no kids.
Jessica says
Yes, Michelle, you are absolutely right.
Michelle Truman says
If they are better off than society is better off. And Policy is supposed to encourage a healthier society. It costs society a lot less when families push well-adjusted kids out into the world. We aren’t talking about being financially better off here. I’m sure if they had two incomes they’d be better off financially but at what cost to the family and to society??? Like i said, i don’t care which parent works, but just as we incent two-parent families through tax status and tax credits, we also incent one parent to stay home and raise the children. It’s always better than outsourcing.
Steve says
Do people really look at the social security benefits they’ll receive decades in the future when deciding whether or not to work today? Do enough people do so that this penalty could be considered a way to shape society, and not just an arbitrary quirk of the formulas?
ksays says
Benefits in these break even cases should be considered much more carefully. In the wife 2 scenario, its like 100% of her work and benefits are thrown away. Here you go, you can only take his – slightly more which is half. Its like getting half. But wife 1, gets her spouse SS, plus half, which is like being handed 150% even though she never paid into the system. So a woman with her hand out her whole life, holds out her hand out again. These loopholes wind up promoting freelance, taking cash under the table, putting two job incomes under one name, life insurance policy schemes, family business schemes, and many other ways to cheat the system, because people know they won’t see it back. Also, wife in couple 1, may not even have children, so forget the whole stay at home excuse. Maybe she watered orchids and raised a dog.
Vicky says
This is true. I worked and paid social security all my life. Yet, because my husband earned a bit more, I would take his survivor benefits. My own benefits will be totally lost to me. Meanwhile, the non earning spouse of someone who made more than my husband, will receive a larger survivor benefit than I will.
Jessica says
You could enjoy the benefits of a single earner home, but you seem to stand on prioritizing wealth accumulation over family. Not saying this applies to the author, but anyone who professes to be a feminist should support society at large valuing the contribution of homemakers, most of who are still female. After all, recognizing and championing the worth of women was the original focus of feminism, back when it still focused on actual women.
You’re just mad that we managed to crack the code. You’ll work until 66 in the hopes of enjoying retirement, so that you can finally have control over your own time. My friends and I have had what you seek since our 20s and 30s, thanks to wise choices in husbands with traditional values who understand the meaning of being providers, and being the kind of women who can hold down a family, support a high value man in his career aspirations, and make a house a home. So don’t hate, congratulate. I look forward to seeing you dual earners in retirement, when we can really assess who made the right choice.
Until then, enjoy going to your jobs every day, haters.