NC State Professor Defuses Social Security Reform Gender Debate

Media Contacts:
Dr. Robert Clark, 919/515-4568 or [email protected]
Pam Smith, News Services, 919/515-3470 or [email protected]

March 22, 1999

NC State Professor Defuses Social Security Reform Gender Debate

FOR IMMEDIATE RELEASE

Some critics of Social Security reform fear that a policy mandating individual retirement accounts would have a negative economic impact on women. That's not the case, says a North Carolina State University professor of economics and business management, who is helping policy makers defuse the emotionally charged debate with research-based information.

Dr. Robert Clark, of NC State's College of Management, recently told the Senate's Special Committee on Aging that shifting Social Security to a system of mandatory individual retirement accounts should not be rejected because of concerns about the quality of women's investments. Clark's research on gender differences in the management of individual retirement accounts showed that women and men make similar investment decisions with their retirement funds.

Clark's testimony to the Senate Committee on Aging was based on his soon-to-be published study, "Making the Most of 401(k) Plans: Who's Choosing What and Why?" (Forecasting Retirement Needs and Retirement Wealth, University of Pennsylvania Press.)

Critics of the mandatory individual retirement account proposal claim that, compared to men, women are less likely to participate in 401 (k) plans, contribute a smaller share of earnings, and invest their pension funds more conservatively, yielding lower retirement benefits.

"I was a skeptic of those assumptions -- assumptions that have made their way into public policy debate without being verified by broad-based research studies. I just didn't believe that women were less qualified to make investment decisions," Clark said.

For his study, Clark analyzed data from 87 companies and 150,000 employees, with annual salaries ranging from $10,000 to $150,000. Counter to popular beliefs, he found that compared to men, women of similar age, job tenure and earnings are more likely to participate in voluntary 401 (k) plans and tend to contribute a larger percentage of their annual earnings; In plans that do not offer or require investments in company stock, women tend to hold about the same percentage of their retirement funds in fixed income assets as do men; And, in plans that offered company stock as an investment option, women allocated a higher portion of their contributions to fixed income assets.

Clark said that nearly every social security reform proposal to shift to individual accounts would require mandatory contributions, so that potential gender differences in participation is a moot point. Some proposals would maintain the basic benefit structure of the current system and would permit voluntary additional contributions to individual accounts on top of the mandatory component. Clark's research indicates that women are as likely as men to take advantage of such a voluntary option.

While Clark challenges assumptions about gender investment choice differences, he notes that gender differences in total retirement fund assets are possible in a shift to a pure individual account plan. For example, women have lower incomes and fewer years of service. (Of all workers beginning Social Security benefits in 1996, the median woman had worked 27 years, while the median man had worked 39 years.) Under the present Social Security System, women receive a greater share of subsidy associated with its progressive benefit formula.

Clark says that this potential negative effect could be moderated by the use of gender-neutral subsidies to the contributions of all low-income workers from the general fund, or by a tax on the contributions of higher income workers.

In his testimony to the Senate committee, Clark identified possible restrictions on the management of individual accounts that could moderate or eliminate potential adverse effects on women. For example, current Social Security provides a widow's benefit equal to the retired worker's benefit. Similar protection could be provided under an individual account plan by requiring that retirement funds be converted to joint life annuities. In such a case a family income would be unaffected by the death of the retired worker. Currently, household Social Security benefits decline by one-third when the retired worker dies.

Change to Social Security as we know it is inevitable, Clark says. No doomsayer, Clark has studied the Social Security system for about two decades, and has sat on a number of presidential advisory commissions. He agrees with most economists who predict solvency for the system until about 2020. "Then things will change when the Baby Boomers reach eligibility. The trust will begin to decline and drop rapidly until 2032 when it will be depleted. Almost everyone agrees that we need to begin doing something," he says, noting that using budget surpluses to "fix" Social Security will push the crisis from 2030 to 2050.

"It makes sense to prudently manage change, phasing in changes to help people change their behaviors," Clark says.

In making the decision whether to adopt mandatory individual accounts as a central component of Social Security in the 21st century, Congress must consider how such a fundamental change in social policy will affect various economic and demographic groups, Clark says. He believes that most gender-related issues associated with the individual retirement account proposal can be addressed by restrictions or requirements concerned with distributions, subsidies and investment options. In other words, Clark says, "the devil is in the details."

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