Distributional implications of the social security spouse benefit.

• Author: Flowers, Marilyn R.

1. Introduction

   The social security retirement program is often characterized as serving dual objectives of individual equity and social adequacy. These are conflicting objectives. Under a pure equity standard, retirement benefits would be distributionally neutral within a given age cohort of retirees. Social adequacy, on the other hand, relates benefits to the relative "need" of qualified beneficiaries and, correspondingly, is explicitly redistributive within an age cohort.

   If one accepts the legitimacy of introducing considerations of need, then some adjustment based on household size is appropriate. Thus the spouse benefit has traditionally been justified as an important "adequacy" component of the retirement benefit formula. However, the method of computing the spouse benefit has been the subject of considerable controversy. Most of the critical scrutiny has focused on perceived horizontal inequity in the formula |2; 4~. This paper, in contrast, examines the spouse benefit from the perspective of vertical equity. A desire for progressivity clearly motivates intragenerational redistribution in the social security retirement program. The basic retirement benefit formula provides a higher implicit return on payroll tax payments to workers with lower career earnings than to workers with higher earnings. The issue to be examined in this paper is whether the spouse benefit in its current form complements or weakens a progressive relationship between household benefits and household earnings.

2. The Social Security Retirement Benefit Formula

   An individual's retired worker benefit from the social security program, his or her Primary Insurance Amount (PIA), is based on earnings in covered employment prior to retirement. All of the individual's earnings which were subject to payroll taxation after 1950 or the individual's 21st birthday, whichever was latest, are indexed based on average wage growth. Five years of lowest earnings are excluded and Average Indexed Monthly Earnings (AIME) are computed for the remaining years. The individual's monthly PIA is then computed by applying a formula to the AIME. In 1991, an individual retiring at age 65 qualified for a retirement benefit equal to 90% of the first $370 of AIME plus 32% of the next $1860, plus 15% of any AIME in excess of $2230. The dollar brackets in the formula are adjusted annually using the Consumer Price Index. If the individual is married to a spouse of retirement age, that spouse receives either his or her own retired worker benefit based on own earnings in covered employment or a spouse benefit equal to one half of the PIA of the retired worker. Thus a couple is guaranteed a minimum benefit equal to 150 percent of the PIA of the highest earner.

   If one regards the appropriate unit of analysis as the household rather than the individual, the spouse benefit in its current form can be criticized on horizontal equity grounds. Because of the either-or nature of the spouse benefit, it is possible for two couples with identical household earnings and payroll tax liabilities during their working lives to qualify for different levels of combined retirement benefits based on how covered earnings were divided between the spouses in each household. The formula clearly favors couples in which one spouse is responsible for the greatest share of earnings as opposed to couples in which earnings are more equally divided.

   In addition to the problem of horizontal equity, the spouse benefit in its present form has the potential to alter the...