BOOMER WOMEN: RETIREMENT'S BRAVE NEW WORLD

Aging Today, Jan/Feb 2007 by Munnell, Alicia H

Women boomers have grown up in a much different world than women currently in retirement. Compared with their predecessors, they married later, divorced more, acquired greater education, participated to a much greater extent in the paid labor force and earned higher wages. Nevertheless, given changes in Social security and the shift to 4Oi(k)-type defined-contribution plans, they will receive less in retirement benefits relative to earnings than current retirees.

Despite the enormous size of the boomer cohort, the oldest of whom are now turning age 60, its female members share a number of characteristics that differentiate them from women currently in retirement. A significant proportion of boomers never married. When they did marry, they married later. At the same time, they divorced at high rates. Divorces rose sharply between the 19605 and early 19705, then fell slightly and finally leveled off at a relatively high rate in the mid-19805. Therefore, when women boomers reach retirement, they are more likely than their predecessors either to have never married or to be divorced.

DEMOGRAPHIC TRENDS

Traditionally, women without husbands have lower household earnings and less retirement income from the earnings-based system. Following this trend, a considerable number of never-married and divorced women boomers can be expected to have lower earnings, less retirement income and higher poverty rates.

Alternatively, women boomers are better educated and have greater labor-force experience than their counterparts now in retirement. In the 1950s and 19605, mothers of young children did not work. By the 1980s and 1990s, young women typically entered the labor force before they married and continued working after they had children. The overall labor-force participation rate of women ages 20 to 64 doubled between 1950 and today, with the largest gains occurring among married women.

In fact, single-earner couples are now a rare commodity, having declined from 67% to 15% of all families between 1940 and 1998. These changes in the laborforce experience of women are due partly to their increased education; fewer dropped out of high school and many more completed college than their older counterparts. Not surprisingly, with more education and greater work experience, the earnings of women have also risen. Generally, boomers have spent most of their working years in a robust economy.

Despite the gains in the economic status of boomer women, they will receive relatively less from the retirement income system than their predecessors. That is, replacement rates-retirement benefits as a percentage of earnings before retirement-will be lower in the future than they are today.

SOCIAL SECURITY

One reason that replacement rates for retirement income will decline is that Social Security will be less generous in the future than it has been to date. Social Security benefits-relative to earnings before retirement-are scheduled to decline even under current law, and further cuts are likely given the program's financial shortfall.

The most obvious Social Security development that will affect boomer women (and men) is the change in the so-called normal retirement age. Current retirees are able to claim full benefits at age 65; early boomers will face a normal retirement age of 66 and late boomers, an age of 67. However, most people do not wait until the normal retirement age and instead claim benefits at age 62. For current retirees, early benefits mean a 20% reduction in overall benefits. For the first wave of the baby boom, though, those who claim benefits at 62 will have their benefits reduced by 25% and people in the second wave who retire early will see benefits decrease by 30%.

Other factors will also reduce the value of Social security. Medicare premiums are deducted from Social security before the check goes in the mail. Projections show that the Medicare Part B premium will claim an increasing share of the average Social security benefit.

Moreover, benefits will be subject to more personal income tax. Under current law, individuals with more than $25,000 annual income and married couples with more than $32,000 of combined income must pay taxes on a portion of their benefits. Because the exemption amounts are not indexed for inflation-much less wage growth-more and more Social security beneficiaries will find their benefits subject to the personal income tax.

Furthermore, as Congress attempts to close Social security's 75-year financing shortfall, legislators are likely to include some benefit cuts as part of the package. In short, net replacement rates for both men and women workers will be much lower in the future than they are today.

In addition, the changing role of women will lower Social security replacement rates for two-earner couples. Social security pays the spouse-generally the wife-an amount equal to 50% of the husband's benefit unless her own benefit is greater. As women go to work, households' earnings increase, but their future Social security benefits often do not. For example, in the case of medianincome workers, the employed wife does not add to the couple's benefit until her earnings exceed 36% of her husband's. Because more than 40% of working wives earn less than this threshold amount, their earnings tend to reduce Social security replacement rates. Among boomers, median replacement rates for one-earner couples will exceed 55%, but those for two-earner couples will average less than 40% of what they previously brought home.