A different viewpoint on survivor’s benefits

Last updated on: August 29, 2016 at 8:12 am by Jane the Actuary

A different viewpoint on survivor’s benefits 2016-08-29T08:12:53-06:00 Jane the Actuary

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So a short time ago I wrote about Social Security’s indirect provision of benefits for women who leave the workforce to take care of children, and as an incidental comment, cited Clinton’s proposal to remedy the situation that

The poverty rate for widowed women 65 or older is nearly 90 percent higher than for other seniors—in part because when a spouse dies, families can face a steep benefit cut. For a two-earner couple, those benefit cuts can be as much as 50 percent. Hillary believes that we have to change that by reducing how much Social Security benefits drop when a spouse dies, so that the loss of a spouse doesn’t mean financial hardship or falling into poverty.

Now, as astute readers pointed out, in the typical case, a surviving spouse is eligible to receive a Survivor’s Benefit. In the typical case, if a wife was receiving benefits based on 50% of her husband’s benefit, because her pay had been lower and/or she had had a lot of gaps in her career, then this benefit would increase to 100% upon her husband’s death, so that the total Social Security benefit would drop only by 1/3 — from 150% of the husband’s benefit to 100%. This seems to me to be perfectly fine. (Remember, too, that if there are dependent children, the benefit increases further.)

But it would seem that what Clinton is talking about is this: in the same way as a wife* receives the greater of the benefit on her own earnings record, or her husband’s record, so, too, a widow receives the greater of 100% of her deceased husband’s benefit or the benefit earned under her own record. Hence, in a case where the husband and wife both had the same earnings history, the widow’s benefits would, in fact, be a 50% drop because the survivor’s benefit wouldn’t be any greater than the benefit under her own record.

(* Yes, I’m writing “wife” and “husband” referencing the traditional case that he’s the higher earner, because it’s easier to keep the two parties straight this way; “spouse” and “other spouse” gets too confusing.)

But here’s the deal: the existing system already has benefits that only married couples can receive, vs. long-time cohabitors, because of the assumption that they protect women who left the workforce to care for children. In the case that Clinton’s talking about, that’s not the case: she simply wants to provide more money to widows on the basis that “two can live as cheaply as one” — that is, the fact that widows’ living expenses do not drop by 50% upon the death of a spouse, because of the fixed expenses of housing, utilities, etc. It would seem that she’s proposing an additional benefit, on top of one’s own Social Security benefit, rather than as a greater-of benefit.

But that’s a much larger question.

Consider the Jane Plan. Recall that the first tier benefit is a flat benefit for all eligible individuals. It is not, unlike the poverty level definition, reduced on a per-person basis for married couples. This hardly seems fair in an era in which couples are perfectly comfortable making the pragmatic decision to stay unmarried when it comes to benefit eligibility. Various other countries resolve this by treating “partnered” couples the same was as married couples, but I don’t know how you’d prove that two cohabitators were “partnered” rather than just roommates. Perhaps they only count as “partnered” those couples on a civil union registry of some kind, or perhaps there’s a further test, such as whether the two have made each other will beneficiaries or granted medical power of attorney to each other, but this seems like it would get administratively complex to identify who are partners and who are roommates. And at the same time, it seems to me that we’d want to encourage, rather than discourage, old folks to have roommates of some kind, rather than living on their own.

But, once we make the determination to keep the benefit at a per-person rate, and married couples thus have a higher total benefit than under a “per-family” benefit program, then they necessarily drop by 50%.

And in the same way, a two-earner couple already had a much higher benefit, as a result of a much higher lifetime income, than a single-income family, and have been enjoying “economies of scale” relative to someone who never married and always lived on their own.

What’s more, the financial hardship a widow faces can be mitigated in the long-term, by changing living arrangements, for instance, moving from the family home to a smaller place — though, to be sure, this doesn’t work in the case of a couple that were already living in tight quarters, as widow who shared the only bed, in the only bedroom, with her husband, isn’t going to do so with a roommate!

So what’s fair?

image: https://commons.wikimedia.org/wiki/File:Social_security_card.gif; originally produced by the Social Security Administration and in the public domain

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