Late-Career Wages Can Boost Benefits for Women

Jun 5, 2017 / By Elaine Floyd, CFP®
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Though Social Security is a gender neutral program, women frequently face unique challenges approaching retirement. Sound Social Security advice can help them navigate these challenges.

The work that still needs doing

“Women not only tend to reach retirement with fewer resources than men, but also typically must stretch their resources over a longer lifespan and contend with larger medical expenses, as well as the loss of a spouse.”

—National Academy of Social Insurance

In this age of gender equality I sometimes catch flak for making the wife the lower-paid spouse in my Social Security examples. There’s good reason for it. Women generally do earn less than men, and the proof is in their PIAs. Between lower wages and fewer years of work, women’s Social Security benefits are about 79% of men’s, on average: $1,182 versus $1,500.

Two recently issued briefs discuss these women’s realities: the National Academy of Social Insurance (NASI) paper, “Overcoming Barriers to Retirement Security for Women: The Role of Social Security” quoted above, and a working paper from the Center for Retirement Research at Boston College, “Do Late-Career Wages Boost Social Security More for Women Than Men?”

The NASI paper is primarily a plea for policy changes arising from the following four challenges:

  1. The persistent gender wage gap
  2. Women’s caregiving responsibilities
  3. The fact that women are more likely to be single and heads of households
  4. Women live longer than men

The NASI recommendations include the following:

  • Revise the PIA formula to give more weight to the first tier of earnings.
  • Provide earnings credits for caregiving.
  • Reduce the marriage duration requirement for divorced-spouse benefits.
  • Raise the survivor benefit so widow(er)s will receive 75% of the couple’s pre-death income (up from 67% on average).
  • Base the COLA on the CPI-E or other index that better reflects the spending patterns of the elderly.

While these policy recommendations are good and important, there’s nothing much your clients can do except support legislation that works in their favor by writing to their elected representatives. When it comes to improving their own benefits, the CRR paper has more relevance.

Boosting benefits late in retirement

We’ve always preached that a key way to maximize Social Security benefits is to work longer and earn more. This goes extra for women. As you know, the primary insurance amount (PIA) is based on a person’s highest 35 years of earnings. If a person doesn’t have 35 years of earnings, those missing years are filled in with zeroes. This serves to lower the average monthly earnings used in the PIA formula. Women are more likely than men to have zeroes on their earnings records due to time taken out of the workforce to raise children. Women are also more likely to have low-earning years due to part-time work or low-paying jobs. In fact, the CRR found that nearly half of the women in their study had at least one year of zero earnings in their top 35 years of earnings.

Delayed claiming is also a key way to boost Social Security benefits. Between working longer and delaying benefits, everyone can boost their benefit—but women more than men. The CRR found that by working one additional year, women could increase their benefit by 8.6%—7% from the actuarial adjustment and 1.6% from the additional earnings. Men’s benefits increase by less—only 7.8%—because they have fewer low-earning years to replace.

Women who delay retirement all the way to their 70th birthday increase their benefits by 88%—76% from the actuarial adjustment, and 12% from late-career earnings—compared to 82% for men. The authors point out that working longer has additional benefits: It allows older people to postpone drawing down their retirement savings; permits them to save longer or accumulate more pension benefits; makes them more likely to maintain their employer-sponsored health insurance; and may have positive effects on their mental and cognitive health.

My Social Security story

If you’ve attended one of our Savvy Social Security two-day workshops and heard me tell my own personal story, you know that I am the poster child for maximizing Social Security benefits. I am still working at age 70 and continuing to replace low-earning years. Each year, when my earnings are reported, a year of lower earnings drops off my record causing my PIA to increase by a few dollars. My benefit, which started last June in the amount of $3,340, includes maximum delayed credits but still has some room to grow as long as I keep replacing some of those earlier low-earning years when I was a struggling freelance writer. As a bonus, I was lucky enough to be able to take advantage of divorced-spouse benefits and divorced-spouse survivor benefits from age 66 to 70 while my own benefit was building delayed credits.

These actions that I took to maximize my benefit—working longer, delaying claiming, and filing for divorced-spouse benefits—came about because of my deep understanding of how Social Security works, coupled with my admitted lack of retirement preparedness. As a single mother, I somehow managed to get my two daughters through college and set a little money aside for retirement on my variable freelance earnings, but I knew it wasn’t nearly enough.

Unlike a lot of women who fail to do the math, I knew I couldn’t afford to retire at 62 or 65 or even 70, not if I wanted to maintain my pre-retirement standard of living. Fortunately, I love my job and have promised Horsesmouth I will be here at least another five years if not longer. By then my earnings record will be close to maxed out.

Meanwhile, I am spreading the gospel, especially to women in their 50s and 60s, about working longer. These are our peak earning years, and to give up those earnings now is to waste a valuable resource. In addition to enjoying the current earnings for ourselves, we can help our families, set aside more funds for retirement and long-term care, and, yes, boost our Social Security benefits.

A note on marital status

Single women (divorced, widowed, or never-married) may have an easier time grasping this message than married women. Women married to successful men who are more than ready to retire after logging their 35 or 40 years of high earnings may feel the pressure to retire at the same time as their husbands. As long as they are set financially and have prepared for her eventual widowhood, there may be no reason for them both not to retire.

But if there is any doubt about a couple’s ability to maintain their standard of living to age 95 or 100, the solution may be for the husband to retire and the wife to keep working, even if it’s for just a few extra years. As her earnings are leveraged into more savings and higher Social Security benefits, it can add the extra cushion that will allow them both to retire with more confidence.

As director of retirement and life planning for Horsesmouth, Elaine Floyd helps advisors better serve their clients by understanding the practical and technical aspects of retirement income planning. A former wirehouse broker, she earned her CFP designation in 1986.

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