Divorce: Economic Issues
DIVORCE: ECONOMIC ISSUES
Divorce is a major stage in life for large numbers of older men and women in the United States (and many other countries). For example, in the United States in 2000, there were more than a million women over the age of sixty-two who were either divorced or separated. Until now this group of women has been relatively invisible within the elderly population.
Difficult as it is to believe, few statistics have been published on divorced older persons and their economic situation. It is common practice in statistical tabulations published by the U.S. Bureau of the Census to combine divorced persons with those who "never married" and/or those who are "widowed." The result is that we know relatively little about this important sub-group of the elderly population. Yet this group is destined to become much more important in years to come, given the fact that divorce rates in the United States have soared to record high levels.
The economic well-being of many older persons has improved over the years. At the same time, there has been increasing concern about those elderly persons whose economic situation remains poor. Numerous studies have documented that poverty among older persons is increasingly concentrated among older women and minorities. Also, there is growing agreement among researchers and policymakers that more attention must be given to understanding why poverty persists among these groups and the feasibility of alternative policies that would effectively respond to the problems.
The economic situation of divorced older women
Overall, the income situation of older divorced women is not very good. Many are poor, and most of the rest have very low incomes. For example, survey data for 1998 indicate that almost one-quarter of older divorced women had yearly total incomes below the poverty line (Social Security Administration).
There are also large differences in the sources of income by poor and nonpoor divorced older women. The poor women receive almost al of their income (86 percent) from Social Security programs. In contrast, income form work, employer-sponsored pensions, and interest plays a much more important role for those with incomes above the poverty level.
A team of researchers at Brandeis University (including this author) focused on the economic situation of older divorced women in the late 1980s. It is widely known that the rate of poverty among all older women is very high, and much higher than for older men. Among older women, however, poverty rates vary greatly. Table 1 shows the 1989 rates for various subgroups of older women. It indicates that, based on a national sample of the U.S. population, poverty rates are significantly higher for women who are divorced or separated than for the other subgroups of older women. If the divorced group is broken down further by ethnic status (not shown in the table), the poverty rates in that year were even higher for minority women: 43 percent for Latino and 46 percent for nonwhite divorced older women.
What about the future?
Social Security benefits are a basic source of income at later ages for most Americans. The federal government's Social Security Administration, in conjunction with several nonprofit research institutions (the Brookings Institution, the Urban Institute, and the RAND Corporation), has developed a projection model to estimate future differences in Social Security benefits by marital status. The model focuses on men and women born between 1931 and 1960.
Not surprisingly, the Social Security model projects that total income at retirement will be larger for men that for women, regardless of when they were born. However, Social Security benefits are projected to differ greatly for men and women of different races, marital statuses, and educational attainments. Women are projected to receive the largest share of their total income from Social Security benefits. And looking only at older divorced persons, the model estimates that divorced men will receive 12 to 17 percent higher monthly Social Security benefits than divorced women.
Two key developments
Two developments over recent years help to explain those projections, which will have an important impact on the economic situation of divorced persons:
- Changes in the divorce laws with regard to the switch in most states to "no fault" divorce (especially regarding alimony and child support payments) have important implications for the economic welfare of divorced women in their later years.
- As employer-sponsored pensions grow in importance as a source of retirement income, older women are likely to be in an increasingly disadvantaged position if current practices and laws do not change.
The "divorce revolution" was launched in 1970, the year that California passed no-fault divorce legislation. No-fault divorce laws have shifted the focus of the legal process from moral questions of fault and responsibility to economic issues of ability to pay and financial need. Ironically, although divorce reform was not intended to create fewer equitable settlements for women, in many cases that has been their precise effect. The no-fault divorce laws promised the abolition of all sexist, gender-based rules that failed to treat wives as equals in the marital partnership. However, a problem arises when the legal system ignores the very real economic inequalities that still exist between women and men in the larger society. Those inequalities are largely a function of the primary responsibility still assigned to women for the care of their husbands, children, and frail elders. The economic discrepancies between the sexes also reflect society's hesitancy to assign a monetary value to women's domestic work. Thus, by treating women and men "equally" at divorce, the legal system largely ignores the very real economic inequalities that marriage creates as a result of the division of labor within marriage.
The no-fault standards for alimony and property awards may be shaping radically different economic futures for divorced men and women. However, research to date on this issue is inconclusive. While some research indicates that the resulting financial situation of women under no-fault settlements is worse than for men, the study reported by Jacob concluded that the effects of no-fault divorce legislation on the economic status of divorced women may be neutral or even positive.
The second new factor affecting women is the evolution of pensions in the workplace. Employer-sponsored pensions play an increasingly important role in providing adequate retirement incomes for significant numbers of Americans. However, data show that large numbers of divorced women will not be covered by these plans, either through their own work or based on the pension plans of their former spouses. For example, in 1998 only 22 percent of unmarried women over the age of 64 received a private pension, compared with 31 percent of all aged units (Social Security Administration).
This situation is likely to have important financial consequences if it continues. Today pension accruals for many workers represent substantial personal wealth. This results primarily from growth since the 1960s in pension plan coverage and improvements in both pension benefit levels and vesting provisions (i.e., the years of service required before the worker obtains a legal right to his or her benefit).
Such accruals have become the subject of greater attention from attorneys and the courts, especially with regard to the question of a spouse's financial interests in pension wealth upon the dissolution of a marriage. How spousal rights to pensions are treated legally depends to a large extent on whether a particular state embraces community-poverty rules for a husband and wife, subscribes to common-law rules modified by the adoption of the Universal Dissolution of Marriage Act, or accepts the pure common-law concept of the property of husband and wife. For instance, in pure common-law jurisdictions, separate property remains such upon a marriage dissolution, and only jointly held property is divided and distributed. In New York (a common-law state), for example, pension benefits or expectations would normally be classified as separate property, and therefore no subject to distribution on divorce. In contrast, in the California case of Smith v. Lewis (California is a community-property state), a wife successfully sued her divorce attorney for malpractice because he neglected her interest in her husband's pension.
Social Security provisions relating to divorce
The Social Security program provides more than twelve different types of benefits—each with its own unique set of eligibility rules and often with different benefits structures. To understand the different benefits provided by the program, it is useful first to distinguish the difference between primary and secondary beneficiaries. A primary beneficiary is a person who receives a benefit based on his or her own work in Social Security-covered employment. In contrast, a secondary beneficiary is a person who receives a benefit because of his or her relationship to a retired worker, a disabled worker, a deceased insured person, or an insured ex-spouse not yet receiving benefits.
One group of secondary beneficiaries relates to spouses: the aged spouse benefit, the child in care spouse benefit, and the divorced spouse benefit. Regarding the last, someone who is sixty-two years old (or older) and was married to a person for ten or more years is eligible to receive a divorced spouse benefit if he or she is divorced from that person and the person is a retired or disabled worker or is a living insured person sixty-two years old or older.
Another type of eligibility arises from being the survivor of a deceased insured person. A divorced person who is at least sixty years old and whose ex-spouse is deceased is eligible to receive a surviving divorced spouse benefit if the marriage to the ex-spouse lasted ten years or more. In addition, divorced persons who survive their ex-spouses can qualify for child in care benefits or disabled survivor benefits.
The amount paid to a secondary depends on a complex calculation of lifetime average earnings, determining what is called the "primary insurance amount" (PIA). The PIA is calculated from the lifetime earnings record of either the retired/disabled person or the insured person. The benefit amount of an aged spouse or a divorced spouse retiring at the "normal retirement age" (currently age sixty-five but scheduled to rise gradually to age sixty-seven) is equal to 50 percent of the calculated PIA. Thus, generally the worker receives an amount twice as large as the worker's spouse or ex-spouse. However, an aged widow(er) or a surviving divorced spouse can receive a benefit equal to 100 percent of the PIA if the benefit received at the "normal retirement age." All benefits before the "normal retirement age" (regardless of marital status) are reduced on the basis of actuarial calculations using estimates of average life expectancy at any particular "early retirement age."
To receive secondary benefits, a person cannot be married to a new partner. A new marriage generally makes a person ineligible to receive, for example, a divorced spouse benefit. Also, a remarried person cannot collect a surviving divorced spouse benefit (unless his or her current marriage occurred after the age of sixty).
Another complexity of the benefit calculation arises when the divorced person is also eligible for a primary benefit, that is, a benefit based on his/her own work history. When a person's primary benefit exceeds his or her secondary benefit, only the primary benefit is paid. Thus, most aged women who are divorced do not receive divorced spouse benefits because of their own work history that entitles them to higher primary benefits. However, the benefit determination is not either-or decision. In many cases a person may receive both a primary benefit and part of a secondary benefit. The primary benefit is paid in full but, if relatively small, is supplemented by the spouse benefit up to the amount the person would have received as a spouse without any work history. And if an individual is eligible for two or more secondary benefits, generally only the highest secondary benefit is paid. Thus, the general operative principle is that an individual cannot pyramid benefits based on two or more eligibility statuses but can receive only a (combination of) benefits(s) equal to the largest of the eligible benefits.
Employer-sponsored pensions and divorce
As indicated above, an employer-sponsored pension is often an important asset that becomes part of the discussions that occur with regard to the disposition of marital property during a divorce. The federal Retirement Equity Act of 1984 provides for the issuance of a "qualified domestic relations order" that can be used by a court to split a pension benefit or account between divorcing spouses, effectively dividing the pension without the need to place a monetary value on it.
There are situations, however, where a division of the pension equally between both parties in a divorce may not be in their best interests. In some cases, for example, other assets within the marriage cannot be easily split (such as a home, trusts, or other real property). In these cases it may be best to determine the monetary value of a future pension benefit so that it may be offset against the value of other marital property.
In the case of "defined contribution" pension plans, the value of benefits accruing to a particular worker can be determined quite easily. Defined contribution plans establish separate accounts for each worker that are valued periodically—often daily.
The benefits of "defined benefit" pension plans cannot be valued so easily, and the benefits generally cannot be assigned or transferred to some other person. There are nearly forty-two million working men and women in about fifty-five thousand, private-sector defined benefit pension plans. The most distinguishing characteristic of these plans is that they promise to deliver a clearly specified (i.e., defined) benefit amount based on a formula that typically relates the worker's benefit to years of service and (somewhat less frequently) to the earnings level of the worker. Thus, the value of these pensions in the future depends on the evolving work history of each worker and any changes in the benefit promise made by the employer in future years. This means that in the case of divorce, it is not a straightforward exercise to place a lumpsum monetary value on defined benefit plan assets held by a worker at any moment in time.
Possible Social Security changes
It is often suggested that Social Security benefits paid to divorced spouses are two low. The 50 percent of the ex-spouse's Social Security PIA received by many divorced spouses is typically below the poverty index used by the federal government to assess income adequacy. Thus it has been suggested, for example, that the divorced spouse benefit be increased to, say 75 percent of the PIA. This would bring the benefit level roughly into line with the levels received by other beneficiary groups composed primarily of unmarried women (e.g., disabled widows and child in care widows). However, this benefit level would still be below the regular widow's benefit of 100 percent of the PIA.
Some people fear that raising divorce benefit levels will encourage divorce relative to the current law. Such a reform, however, is unlikely to have a significant effect on young or middle-aged persons who are not apt to be thinking about their retirement years when divorce is considered. Even at later ages, however, such a change is unlikely to have a major effect, given the many other considerations that go into such decisions.
With a continuing focus on federal budgetary matters and the possible "privatization" of Social Security benefits, benefit level reform has received little political attention. Because of this and the lack of information, it is not likely that the economic issues related to divorce and its impact in old age will be addressed in the near future.
James H. Schulz
See also Divorce: Trends and Consequences; Marriage and Remarriage; Pensions; Social Security; Widowhood: Economic Issues.
Choudhury, S., and Leonesio, M. V.. "Life-Cycle Aspects of Poverty among Older Women." Social Security Bulletin 60, no. 2 (1997): 17–36.
Jacob, H. "Another Look at No-Fault Divorce and the Post-Divorce Finances of Women." Law and Society Review 23, no. 1 (1989): 95–115.
Moss, A. Your Pension Rights at Divorce. Washington, D.C.: Pension Rights Center, 1991.
Schulz, J. H. The Economics of Aging, 7th ed. New York: Auburn House, 2000.
Social Security Administration. Income of the Population 55 or Older, 1998. Available at www.ssa.gov/statistics
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