Social Security, Employment, and Retirement Outcomes for Single Mothers

Richard W. Johnson, Urban Institute
Melissa M. Favreault, Urban Institute

The labor supply of single mothers with young children has increased sharply in recent years. Increasing numbers of unmarried women with children under 18 have entered the labor force over the past decade as expansions in the Earned Income Tax Credit raised the returns to work for those with limited skills, welfare reform reduced the availability and generosity of public support for those with limited incomes, and the strong economy of the late 1990s increased job opportunities for all workers. In 1999, labor force participation rates were higher for single women with young children than for married women or single women with no children. This historic increase in labor supply by single women with young children may have important implications for their future retirement security. Many older women who raised children outside of marriage currently receive limited Social Security and pension benefits, because they spent little time in the labor force and lack spousal benefits. The recent increase in labor supply by single mothers will likely lead to higher levels of Social Security (and possibly private pension) wealth among future cohorts of older women. However, the exact relationship between employment and future retirement wealth depends on earnings, the continuity of employment, marriage histories, earnings of the spouse, and employer-sponsored pension coverage. This paper examines retirement income in the current cohort of elderly women and simulates future levels of retirement wealth for low-income women who raise children outside of marriage. Methods The paper consists of two parts. We begin by examining retirement income for elderly women in 1998. We compare income by educational level and history of single motherhood. We examine income received from Social Security, private pensions, SSI, earnings, and other sources and compute poverty rates. We also examine retirement wealth in 1992 for a cohort of women born between 1931 and 1941 who are approaching later life. This work provides new evidence on the economic vulnerability of low-skilled women in later life who have raised children outside of marriage. The second phase of the project simulates retirement wealth for recent cohorts of low-skilled women. Projections are based on a dynamic microsimulation model, which ages individuals year by year, capturing the interactions among key demographic and economic events. An important part of this phase of the project is to develop new estimates of labor supply for low-income single mothers with young children. Based on these labor supply equations and projected marriage histories and savings behavior, the model simulates future levels of retirement income from Social Security, employer-sponsored pensions, SSI, and other sources. Simulated retirement outcomes are compared to outcomes that would have prevailed if women’s labor supply followed historical patterns, instead of the patterns implied by the new equations that reflect recent increases in employment. We also examine the sensitivity of our results to alternative assumptions, such as those concerning the likelihood of an economic downturn that reduces labor supply. Data The project utilizes data from a variety of sources. Descriptions of retirement income for current cohorts of elderly women are based on the 1998 wave of the HRS. Descriptions of retirement wealth for women in the 1931-41 birth cohort are based on the 1992 wave of the HRS and incorporate earnings data from Social Security administrative records and employer-sponsored pension data from plan providers. Simulations of retirement wealth and income for future cohorts of single mothers are based on DYNASIM, a dynamic microsimulation model developed by the Urban Institute. DYNASIM forecasts future demographic, social, and economic characteristics of the population by simulating births, deaths, marriages, divorces, labor supply decisions, and earnings trajectories. It includes a Social Security benefit calculator and an employer-sponsored pension plan module. DYNASIM’s core characteristics have recently been updated with 1990s data from Survey of Income and Program Participation (SIPP). New estimates of labor supply for single mothers are based on data from the 1996 SIPP panel. Significance The rise in labor supply by unmarried women with young children has potentially profound implications for the economic security of older women. Unmarried elderly women currently have the highest poverty rates of virtually any demographic group. Recent increases in employment by single mothers may improve retirement outcomes for low-income women, reduce rates of poverty, and limit dependence on SSI. Although the recent increase in labor supply by single mothers has been well documented, there has been very little research on how this trend may affect future levels of retirement income. The only published study on this topic, by Sheila Zedlewski, found that women with moderate welfare use should do better under Social Security in the future, but women with extensive welfare use will still fall significantly short of the SSI benefit guarantee if they retire at age 62. However, her results were based on a very small number of observations in the Panel Study of Income Dynamics (PSID). The present study will extend this work by more carefully modeling labor supply decisions by single mothers and by utilizing dynamic microsimulation techniques to capture the effects of marriage histories and spousal earnings on Social Security benefits and retirement outcomes. The study will also provide new information on interactions among the welfare, tax, and Social Security programs.