On
October 15, 2000, I walked away from a half million dollars
in Social Security retirement income. That’s
the day my daughter was born and the day I left the workforce
to care for her.
Moms are busy people,
and learning about the intricacies of the Social Security program
usually doesn’t even make it onto their to-do lists.
“I’ve
got a long time to plan for my retirement.”
“Oh, my husband
handles all the long term financial planning.”
“I’m a
mom. I don’t have time to learn about a complicated subject
like Social Security.”
Sound familiar?
Few mothers take the
time to look at how their caregiving responsibilities impact
their Social Security eligibility and benefits. But if you
understand the basics about how Social Security works, you
can act to maximize your benefits, compensate for gaps in the
program, and better analyze the various reform proposals.
Here’s the deal.
When you work for pay, you earn Social Security credits. If
you earn enough of them, you will be eligible for various parts
of the program including retirement benefits. Once you are
eligible for retirement benefits, the amounts are then calculated
using earnings over your lifetime. If you don’t have
enough credits or earn less than your spouse, you can also
choose to take half of your spouse’s benefit at retirement.
Do you know where
you stand? As complex as Social Security is, it’s easy
to learn enough to make a big difference. And it’s worth
the effort because what you don’t know now can hurt you
later.
How
much credit do you have?
The
first basic in understanding your benefits is your
admissions ticket - credits. You earn credits toward
Social Security eligibility when you work and pay Social
Security taxes on your earnings. In 2003, you receive
one credit for every $890 you earn, up to a maximum
of 4 credits per year. Anyone of working age today
needs 40 credits to be eligible for retirement benefits
based on her own earnings rather than her spouse’s.
Typically, that means working full-time for 10 years.
Credits also play
a role in other Social Security benefits. The program includes
survivor’s benefits, Medicare, and disability benefits.
Each of these has specific credit requirements. Knowing where
you stand on Social Security’s other benefits is as simple
as requesting a statement and can give you some peace of mind.
Recommendation: Check
your Social Security statement. You should receive an annual
statement around your birthday or you can request one at www.ssa.gov
or by calling 1-800-772-1213. Do you have the 40 credits you
need for retirement benefits on your own work record?
Recommendation: Depending
on your specific situation, you may want to consider working
enough to earn 40 credits toward retirement. In 2003, you need
to earn $890 for one credit, $3560 for four. These can even
be earned through a home-based business as long as you pay
the appropriate Social Security taxes on your income.
Recommendation: Determine
whether you or your spouse is currently eligible for survivor’s
benefits if the other dies. Your Social Security Statement
will tell you whether you have earned enough credits for your
family to receive benefits upon your death.
Recommendation: Determine
whether you are currently eligible for Medicare Hospital Insurance.
Your Social Security Statement will tell you whether you have
earned enough credits to be eligible on your own work record.
Almost anyone 65 and over is eligible for the more basic Medicare
Medical Insurance by paying a monthly premium.
Recommendation: Determine
if you are currently eligible for disability benefits and what
it would take to remain or become eligible. Your statement
will tell you if you are currently eligible and how much your
monthly benefit would be. No one offers disability insurance
for unpaid workers so Social Security is one of the only ways
for mothers out of the workforce to be covered for disability.
For most of us, you need 20 credits earned in the 10 years
immediately before you become disabled to be eligible for Social
Security’s disability benefits.
How
much money will you lose?
After credits, the next basic Social Security component to understand is how
your retirement benefits are calculated and how leaving the workforce or cutting
back on work impacts those benefits. Once you earn 40 credits, your monthly
retirement benefit is calculated using your 35 highest earning years. These
earnings numbers are tweaked and massaged by the Social Security administration
accountants to factor for various things, but the bottom line is the higher
your earnings, the higher your monthly retirement benefit.
Of course, the reverse
is also true – the lower your lifetime earnings, the
lower your monthly retirement benefit and mothers have the
lowest lifetime earnings. While the wage gap between men and
women has fallen, the wage gap between mothers and everyone
else has widened. When they compared the earnings of people
who have never had children, The National Longitudinal Survey
of Youth found that women's earnings approach 98 percent of
men's earnings. There is virtually no wage gap between childless
men and childless women.
On the other hand,
mothers earn 73% or less of the wages their male counterparts
earn, whether or not they are fathers. And then there is the
2/3 of all mothers who are working part-time or who are out
of the workforce who earn even less. The result is a wage gap
between mothers and everyone else that is big and getting bigger.
Since 81% of women
become mothers, most women pay a double penalty for spending
time caring for their children. They lose income over their
lifetime and then that decreased income is used to calculate
their Social Security retirement benefits. In 2000, women’s
average monthly retirement benefit was $697. Men’s was
$904.
Mothers take a hit
to their lifetime earnings in three ways -- the first is that
they are more likely to take time out of the workforce to care
for children or elderly relatives. According to Joan
Williams, director of the Program on Gender, Work, and
Family at American University Law School, among mothers ages
25 and 44, the key years for career advancement, 1 in 4 is
out of the workforce. Over time, these years add up. Of workers
retiring in 1998, women worked a median 29 years while men
worked 38.
Although the gap is
projected to narrow, women are expected to continue to work
fewer years over their lifetimes. Men who work the median 38
years have no trouble posting earnings in the 35 years used
by the Social Security Administration to calculate monthly
retirement benefits. In fact, they can drop their 3 lowest
earning years out. On the other hand, mothers who work the
median 29 years will have 6 zero years averaged into their
calculations. As Ann Crittenden, author of The
Price of Motherhood, observes, “The biggest
injustice for women in the Social Security system is that it
simply doesn't consider their work as mothers as work. Raising
a child, who will grow up to support the Social Security system
in the future, does not count as a contribution to the system.
You earn a zero for every year you spend raising your own child.”
Mothers take another
hit because they are more likely to work part-time. Over 40%
of mothers work part-time, meaning less than 40 hours a week.
In 1998, 67.5% of all part-time workers were women. Not only
do part-time workers earn less because they are working less,
they also earn proportionately less. On average, part-time
workers earn 40% less per hour for the same work as full-time
workers.
Finally, even when
they work full-time, mothers earn less than everyone else.
Mothers are more likely to avoid jobs which require substantial
overtime and more likely to take lower paying jobs with regular
hours and flexibility. Again, Joan Williams points to the group
of mothers ages 25 and 44. Her research tells us that of those
that are employed, 2 out of 3 work less than a 40-hour week.
Only 8 percent work more than 50 hours. Yet we’re all
aware of the overtime hours often required to get ahead these
days. “Mothers don’t work overtime,” Williams
concludes, “But 1 out of 4 fathers works more than 50
hours a week.”
The decreased earnings
for all these reasons create a benefit disparity which would
seem to be disturbing enough all by itself. But it’s
compounded by the happy reality that women live longer than
men. What’s the down side of living an average of 3.5
years longer than men? Women depend on Social Security benefits
longer and are more likely to run out of other retirement assets
and depend solely on these benefits. It’s not hard to
see why the poverty rate for elderly women is nearly twice
that of elderly men.
In spite of the potential
for huge financial impact, Social Security is rarely one of
the host of factors families consider when making decisions
about balancing work and family. For the sake of your family’s
finances and your financial health in old age, it pays to understand
how your work patterns will impact your benefits so you can
consider both short-term and long-term impacts.
Recommendation: Maximize
your 401k contributions or other retirement contributions while
you are working to help compensate. Social Security alone will
not be enough to provide for your retirement. It should serve
as a supplement to other retirement savings.
Recommendation: The
retirement age for those born in 1960 or later is 67. Check
your Social Security statement. How many potential earning
years do you have between the time you started working and
age 67? How many years do you have where you could afford to
leave the workforce or cut back on your paid work and still
have 35 years of high earnings?
Recommendation: When
you plan for retirement, be sure to include realistic estimates
of your Social Security benefits based on reasonable assumptions
about your work patterns.
What’s
a spouse worth?
Another basic building block of Social Security is the spousal benefit. At
retirement age, you can choose to claim 100% of the benefits based on your
own work record or 50% of the benefits your spouse has earned. For married
women who have not worked for pay at all or very little, 50% of their spouse’s
benefits serves to compensate them for years of unpaid caregiving work.
For mothers who do
work enough to claim benefits on their own record, they often
find that they are still better off taking 50% of their husband’s
benefit because they have earned significantly less than their
spouse. In fact, although men are also eligible to take the
spousal benefit, today 63% of women claim the spousal benefit
while only 1.2 % of men do. Many mothers who work get no added
benefit from the Social Security taxes they pay, because they
end up claiming the spousal benefit anyway.
To make matters worse,
you must be married for 10 years in order to qualify for benefits
on your spouse’s work record. Divorce the day after your
10th anniversary, and you get 50%. Divorce the day before and
you get zero. Since the average length of a marriage today
is 7 years, this 10 year requirement leaves many mothers high
and dry. A woman who divorces after 9 years of cutting back
or staying at home to care for the children of a high-earning
spouse, can find herself with no eligibility for Social Security
benefits to reward that unpaid work.
Even if you do divorce
after 10 years, you face the prospect of getting decreased
benefits. If you remain married, he claims 100% and you claim
50% of his benefits - in effect providing you each with 75%
of his benefits. After a divorce, you get the 50% benefit and
he gets the 100%. To add insult to injury, in a divorce, most
state laws do not allow the courts to award additional assets
to a spouse in order to compensate for this loss of Social
Security income.
Recommendation: Consider
the spousal benefit calculation when making decisions about
working for pay and planning for retirement. Review both spouse’s
Social Security statements together.
Recommendation: Even
if you are working only part-time or are out of the workforce,
consider contributing to a retirement plan in your own name.
Recommendation: No
one plans to divorce, but just be aware that 10 years is an
important milestone.
How
will this impact your decisions?
When I took the time to look at the impact on my benefits, I used the Social
Security Administration’s own calculators on their website to look at
two scenarios. In one, I assumed that I continued to work full-time in my same
line of work until retirement without interruption. In the other, I assumed
that I left the workforce for seven years to care for my daughter and then
reentered full-time. Leaving the workforce for seven years cost me $2000 a
month in retirement benefits. Assuming I live to be 87 that’s nearly
a half million dollars.
Looking back, the
half million I unknowingly walked away from the day my daughter
was born wouldn’t have changed our decision about her
care. There are so many personal and practical things that
go into that decision for each family. But I do wish we had
known to consider these factors. I have now figured out that
I can stay out of the workforce or cut back for up to 5 years
and still have 35 years of high earnings on record and that
will influence our next decision about my work. My new found “expertise” in
Social Security has also motivated me to pay close attention
to potential Social Security reforms to make sure they remedy
the price mothers pay for caring for their children. I’ve
decided I can’t afford not to understand how Social Security
impacts my family and me. Can you?
Find
Out More
Mothers can’t afford to ignore the workings of Social Security. The majority
of us will spend 1/3 of our lives on our own financially. In their guide, “Social
Security and Today’s Woman,” the Social Security administration
tells us, “Whether a woman works, has worked, or has never worked, it
is important that she knows exactly what Social Security coverage means to
her.” There are several ways to learn more about Social Security.
The Social Security
Administration’s central website:
www.ssa.gov
The Social Security
Administration’s own website for women:
www.ssa.gov/women
Or call Social Security’s
toll-free number for questions
or to find a local office: 1-800-772-1213
Social
Security Reform
As Ann Crittenden, author of The Price of Motherhood, warns, “Many
are skeptical now that Social Security will exist when they retire. On this
they are wrong -- it is, and will remain the single greatest source of income
for older American women.” It is more likely, however, that there will
be major Social Security reform during your lifetime. Keep your eye on these
and other proposals:
- Family
Service Credit. Provides credits and posts earnings
to the Social Security system for the low earning parent
in years that children are under six or for someone caring
for elderly relatives.
- Drop Out
Years. Provides a number of “drop-out” years
to primary caregivers for each child. Instead of averaging
earnings over 35 years to determine retirement benefits,
earnings would be averaged over 35 years minus the number
of drop out years.
- Income
Splitting. Requires married couples to “split” their
combined income for the purposes of Social Security credits.
Regardless of who earns what, each spouse gets Social Security
credit for half the combined income.
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