Economist Sita Nataraj Slavov wants to “bring Social Security out of the dark ages and get it to reflect the reality of today’s two-earner families”. This is a war waged only in the US, for no other country has non-contributory spousal benefits even close to what the US offers in its pension system.
Here’s how the system works. Single people pay payroll taxes and collect benefits based on their own earnings. Married people pay payroll taxes based on their own [individual] earnings and can collect either a spousal benefit or a benefit based on their own earnings (whichever is higher); they can also choose to switch to a survivor benefit if they are widowed. Thus, a non-earning spouse who pays no payroll taxes can still claim Social Security benefits based on the earning spouse’s work history.
As a result of this design, one-earner couples get a much higher rate of return on their Social Security contributions than two-earner couples and singles. The Social Security Administration estimates that a two-earner couple or single person – born in 1949 and with average earnings – can expect to receive an inflation-adjusted rate-of-return in the 2-2.5 percent range. …. In contrast, a one-earner couple with an average-earning husband receives an inflation-adjusted rate-of-return of more than 4.5 percent. ….
A number of reforms are possible to catch Social Security up to present-day social realities. For example, we could reduce or eliminate spousal benefits, at least for high-income families. Alternatively, we could replace the spousal benefit with “earnings-sharing,” which would divide a couple’s earnings equally between them for the purposes of computing Social Security benefits.
Sita Nataraj Slavov, “Social Security’s War On Working Wives“, Real Clear Markets, 17 October 2012.
Another way of looking at this is to see that spouses in the US are entitled to a non-contributory benefit – a minimum guaranteed pension for life – financed with a very regressive payroll tax. This benefit is not a flat amount for everyone. Rather, it is higher, the higher the income of the spouse. More precisely, this minimum pension is equal to 50% of the earned pension of a spouse while he is alive, increasing to 100% when he dies. (The beneficiary could also be ‘she’ rather than ‘he’, but almost always the male has higher earnings than the female.)
Ms Slavov thinks of the spousal allowance as a tax on working wives, which discourages them from working. I think her approach is the correct one. But, is the spousal allowance not also a subsidy for traditional families, for stay-at-home mothers? Not really, because the subsidy is given to childless spouses, even to divorced spouses, so long as the marriage lasted at least ten years. And, if the purpose of encouraging women to stay at home is to care for children, why not subsidise this directly, with mothers’ allowances?
This is an excellent blog, and I recommend that you read it. Sita Nataraj Slavov is a resident scholar at the American Enterprise Institute and previously was a senior economist at the Council of Economic Advisers.
Thanks to Andrew Biggs for the pointer.