Thursday, November 29, 2012

Marriage Market: Love and Financial Planning

“I take thee as my lawfully wedded husband and my social insurance for old age” makes for an awkward wedding vow, but a plausible one. Petra Persson, Ph.D. Candidate at Columbia University and a WAPPP fellow, examined the effects of social insurance policies on the marriage market. Through econometric modeling, she demonstrated the effect of a specific policy change in Sweden in 1989 on the decision of couples to marry.

The idea is that when Sweden changed its survivor benefits policy in 1989, there was an announcement that unmarried couples who had a child could get married by the end of the year and still qualify for the “old” benefits. The new benefits were significantly lower – a one-time payment to the surviving spouse, versus an annuity to the surviving wife under the old system. Lo and behold, a record number of couples got married in the last quarter of 1989. There were also differences in divorce rates and other indications that the marriage market responded to the change in social insurance policy.

In the case of Sweden, the reform was not intended to incentivize marriage, but the fact that there was a marriage market response has implications for when it’s optimal to separate social insurance from marriage. Ms. Persson argues, convincingly and quantitatively, that the society’s gender wage gap is the key determinant of whether it’s optimal to separate social insurance from marriage.

In a hypothetical country with large gender gaps and a traditional structure where everyone marries for life and husbands are the breadwinners, there are economic gains from tying benefits to marriage. The social insurance helps the surviving woman who cannot provide for herself. In the opposite hypothetical scenario, where not everyone marries but everyone works, there are no gains from tying benefits to marriage. In fact there are losses when money is transferred to a survivor who is self-sufficient without it. In a realistic society where there is an intermediate gender wage gap, a social planner faces the trade-off between protecting the elderly women from poverty and distorting the marriage market.

To illustrate the trade-off, consider that the reforms in Sweden took place for budgetary reasons, but were couched in gender equality rhetoric – under the new system, it didn't matter whether a man or woman was the survivor, he or she would get the same one-time benefit. Sweden in the 1980’s, of course, still had its share of traditional marriages and women who did not work. Since women typically live longer, the removal of the widow annuity resulted in an increase in number of destitute old women. The government then had to step in again and provide welfare payments to these women – essentially creating a safety net program where the social insurance proved insufficient.

On the one hand, providing a safety net for the elderly is more equitable – a social safety net does not distinguish whether the man or woman was ever married. Why should we reward marriage, distorting the marriage market? On the other hand, social insurance is something every working individual pays into to tap in old age; so if this person dies before claiming the benefit, it is plausible that his or her family deserves some share of that money. 

These are the fundamental questions of social policy design. As evidenced by the Swedish example, the policies that flow from these questions have practical financial planning implications for couples contemplating taking the plunge…because nothing says “I love you,” like a conversation about social insurance.

Anya Malkov is an MPP candidate at the Harvard Kennedy School, a WAPPP Cultural Bridge Fellow, and an alumna of From Harvard Square to the Oval Office.

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