When will the gender gap in retirement income narrow?

• Author: Even, William E.
• Position: Pensions

1. Introduction

   The real incomes of elderly women are substantially below that of elderly men. Among people aged 65 and over in 1994, median income was $15,250 for men and $8950 for women. (1) Moreover, the gender gap in median incomes of people aged 65 and over has been stagnant over the past 50 years. The female-male ratio of median incomes in the population aged 65 and over was 0.61 in 1950 and fell only slightly to 0.59 by 1994.

   There are several important reasons why income among the elderly is lower for women than men. First, on average, women accumulate less work experience and have lower earnings than men. Second, among employed people, women are less likely than men to be covered by a pension plan. The combination of less work experience, lower earnings, and lower pension coverage among women contributes to less retirement income from Social Security and private pensions.

   Over the past 50 years, the labor market behavior of women has undergone dramatic change that should contribute to a reduction in the gender gap in income among the elderly. Compared with 50 years ago, there has been a diminution of gender differences in labor force participation rates, experience, and earnings. Gender differences in pension coverage rates also narrowed. Nevertheless, gender differences in income among the elderly persist at levels comparable with those of 50 years ago.

   This article investigates several dimensions of the gender gap in income among the elderly and examines the prospects for a narrowing of the gap in the near future. Section 2 shows that the gender gap in Social Security and private pension income among retirees fell only slightly over the past 25 years. Explanations for the persistence of this gap are discussed. Although the gender gap in pension income changed little over the past 25 years, section 3 shows that women's pension coverage in the working-age population improved substantially relative to men's over the same period. Projections of the resulting improvements in women's pension income relative to men are illustrated in section 4. The underlying causes of the remaining gender gap in pension coverage and benefits are investigated in section 5. The analysis suggests that if women continue to close the gender gap in labor market experience, virtually all of the gap in coverage will disappear. However, among workers with pensions, there may be little improvement in women's pension income relative to men's.

2. Historical Evidence on Sex Differences in Retirement Income

   Over the past 50 years, sex differences in women's labor force participation rates and earnings diminished substantially. Between 1950 and 1999, the labor force participation rate among men fell from 86% to 75%, whereas it rose from 34% to 60% among women. (2) Among full-time workers, women's median annual earnings as a percentage of men's rose from 64% in 1951 to 73% in 1998. (3) Despite these improvements in women's earnings and labor force attachment, the female-male ratio of income among people aged 65 and over has stagnated.

   Among married retirees, the division of income from joint assets may mask the effect of women's labor market behavior on sources of retirement income. For example, if married women's earnings increase and their contributions to a joint savings account rise, their share of the income from the joint account could remain unchanged. This section examines whether women's improved labor market attachment has helped close the gap in two sources of retirement income that are most directly related to a worker's own earnings history--Social Security and private pension income.

   Social Security

   Increased earnings and years of experience among women will eventually translate into higher Social Security benefits. However, as noted by Levine, Mitchell, and Phillips (2000), the structure of the Social Security system could lead to minimal increases in women's benefits. There are two primary reasons for this. First, to be fully insured for Social Security, a person must have a minimum of 40 quarters of covered employment. Thus, increases in labor force attachment that are insufficient to raise women above the 40-quarter minimum will have no effect on Social Security benefits. Second, the fact that married women are entitled to spousal benefits can lead to a situation where additional years of Social Security earnings have no effect on the Social Security benefit. The reasoning behind this latter point requires some explanation of how Social Security benefits are calculated.

   Calculation of the monthly Social Security benefit for a fully insured worker requires evaluation of the worker's average indexed monthly earnings (AIME). AIME is the average of the 35 highest years of indexed earnings subjected to Social Security taxes. The monthly benefit that a worker would receive at the normal retirement age is referred to as the primary insurance amount (PIA). It is calculated by applying a progressive replacement rate formula to AIME. (4)

   A married woman is entitled to the greater of her own PIA or a spousal benefit that equals one half of her husband's PIA. If a married woman and her husband are both fully insured, she is "dually entitled," and she receives the greater of her own benefit and the spousal benefit. (5) Given the nature of spousal benefits, any fully insured woman whose PIA is less than one half of her spouse's will receive a benefit based on her spouse's PIA. Any increase in her earnings history insufficient to raise her own PIA above one half of her spouse has no impact on her Social Security benefit. In fact, Levine, Mitchell, and Phillips (2000) show that approximately one third of married women approaching retirement in the 1990s faced this scenario. (6)

   Amendments to the Social Security benefit formula passed in the 1970s may have contributed to the lack of improvement in women's benefits. With passage of the amendments, between 1971 and 1994, the number of years of earnings used to calculate AIME gradually increased from 15 to 35. (7) Increasing the number of years of earnings used in the formula would reduce women's AIME (and therefore, their PIA) relative to men's if women have fewer years of Social Security earnings.

   To provide some evidence on trends in Social Security benefits, Table 1 presents data provided by the Social Security Administration on the average retirement and spousal benefits awarded to men and women between 1980 and 2000. (8) In this data, any woman who is dually entitled to a retirement benefit (based on her own earnings history) and a spousal benefit is counted as receiving a retirement benefit, not a spousal benefit. The only women who are counted as receiving a spousal benefit are those awarded a spousal benefit but who are unqualified for Social Security based on their own earnings history. The value of the retirement benefit includes any amount due to a woman's own earnings history as well as any supplement that is necessary to raise her total benefit to the level of her spousal benefit. (9)

   Despite substantial increases in women's labor market attachment, among those eligible for Social Security, average benefits among women remained stagnant relative to men's. Although there was modest variation in the ratio over the 20-year period, the female-male retirement benefit ratio started at 0.65 in 1980 and remained at 0.65 in 2000.

   Although there has been little improvement in women's Social Security benefits relative to men's over the past 20 years, separate data reveals that the share of women with a sufficient earnings history to qualify for Social Security has grown. Among women aged 62 or older, the percentage entitled to Social Security benefits as a worker grew from 56.9 to 64.9 between 1980 and 1999. (10)

   Overall, the evidence suggests that women's Social Security benefits have been stagnant relative to men's over the past 20 years despite the fact that their labor force participation rates and earnings improved. The structure of the benefit formula is one plausible explanation for the lack of improvement in women's benefits. Another possible explanation is that as more women have become eligible for Social Security benefits, the incremental women may have fewer years of experience or lower earnings. This would contribute to a reduction in the average benefit of the women who are eligible for Social Security.

   Private Pensions

   To examine trends in private pension income over the past 25 years, we use data from the March Current Population Surveys (CPS) between 1976 and 2001. We restrict the sample to people who are aged 65 and over and are not employed. Since the March questionnaire asks about income in the year prior to the survey, the pension income levels and coverage rates reflect the years 1975 through 2000. Since 1989, the March CPS provides information on income from private pensions. Between 1976 and 1988, however, income from private pensions, survivor, and disability benefits are combined into a single category. To generate a time-consistent series of data on pension income from a person's own prior employment, we estimate the probability that a retiree has private pension income conditional upon receiving some form of survivor, disability, or pension benefit using the CPS data for 1989 through 2001. The probability is allowed to vary by marital status, sex, and age. These group-specific probabilities are used to estimate whether a given person with pension, survivor, or disability income prior to 1989 has pension income. This allows us to estimate a series of private pension coverage rates for retirees in the CPS between 1976 and 1988. (11) A similar approach is used to estimate private pension income for retirees receiving pension, survivor, or disability income. A potential concern with this approach is that the probability of pension coverage conditional on receipt of pension, survivor, or disability income may have changed over time, leading to...