Gender Issues in Pension Systems

1. Gender Issues in Pension Systems By Estelle James Prepared for Women and Pensions Workshop, Paris, March 2010

2. Gender issues in social security • Majority of old people and most very old are women • Poverty among the old is concentrated in very old women • So women should be at the forefront of old age security systems • However--today’s systems may be appropriate for women of yesterday but not for women of tomorrow; re-evaluation needed • Also, rethinking needed in DC context

3. Why does social security affect men and women differently? • Some rules are gender-specific—e.g. younger retirement age for women in many countries • Same rules have different effects for women because they have different employment and demographic histories • Fewer years of work, lower wages so contribution-based pensions smaller, safety net more relevant • Greater longevity—so lifelong pension, annuitization, indexation more important • Become widows—survivors’ benefits important

4. But these differences are changing • When ss started, strong social norms determined women’s roles—married young, many children, divorce rare, low lfpr • Now—women marry later or not at all, few children or none, divorce common, many work, at least part of the time • Women now have more choices about work in market vs. home. Studies show that incentives from ss system can influence and distort these choices; important to avoid work disincentives

5. Women are varied group • Important to bear in mind that all women are not the same—earlier vs. later generations, married vs. single, young-old vs. old-old, high vs. low income--what are their problems, who should get benefits that exceed contributions? • Old rules protected married women who weren’t expected to work in market • May not be best for younger generations who may not marry, have choice about work in home vs. market, and live to be old-old

6. Policies with gender implications • Earlier retirement age for women • Structure of safety nets • Survivor benefits • Payout rules--annuitization, indexation, unisex • What is their impact on work incentives, cross-subsidies and vulnerability of old-old?

7. Earlier retirement age for women • Legal retirement age often 5 years earlier for women • Equal in US, most W. European countries have moved toward equality • But earlier age for women in most E. Europe, L. Am., China • Studies (e.g. Gruber and Wise) show most workers start pension, stop work as soon as possible • Leads to lower lfpr for women, less training, experience, smaller wages, lower pensions for very old women, less contribution to GDP • Social rationale? But conflicts with goals of pension adequacy, poverty avoidance, gender equality, especially in new DC systems • Yet change is very difficult politically (Poland, Chile)

8. Problems with Safety nets • Women work, earn, contribute less than men • Leads to own-pensions, need safety net • Most European countries (& Chile) pay flat or minimum pension to low or non-contributors • Targeting based on income, not marital status • Women are major recipients (if they meet contributory requirements) • Usually these are phased out (30-50% rate) as own-pension grows so reduces return to work • In U.S. safety net is smaller, except for married women who get large spousal benefits—subsidy based on marital status • Crowds out own-benefit, reduces returns to work

9. Why mandatory survivors benefits? • Women are younger than husbands, live longer, become widows. Smoothing consumption over life cycle should include widowhood as another life stage for women • Studies show families are myopic, don’t save and insure enough to smooth (reason for ss). So poverty is concentrated in very old widows. • Mandatory survivors insurance smooths living standards for widows, prevents poverty • SS systems often give 50-80% of husband’s benefit to widows (100% in U.S.)

10. Problems with survivors’ programs • Costly subsidy to married couples from singles • Nonworking widow gets larger pension than single low-wage woman, financed by common pool • Usually widows must give up own-pension to get survivor’s benefit—discourages work • Recent cuts, espec. E. Europe & Scandinavia— • Eliminated except for temp. adjustment period • This reduces cost, subsidy, work disincentives • But creates new problem that is overlooked • Ignore hh economies of scale--hh costs fall by <30% when husband dies but hh income falls by > 50%, so widow’s living standard must fall—for long period • Less protection for old-old women

11. How to smooth living standards without costly subsidies and work deterrents • DC plans in Chile and other L. Am. countries require spouses to purchase joint pension • Like mandatory life insurance • Each spouse takes lower primary benefit to cover joint pension so internalizes cost within family • Solves myopia problem without imposing cost on others or increasing fiscal burden • Maintains widow’s standard of living • Widow keeps own pension + joint benefit so doesn’t penalize work (lfpr rose) • Symmetrical for men & women—family insurance • Could be adapted for DB in social security

12. Should pensions be indexed? To prices or wages? Why a gender issue? • Price indexation holds real pension constant; wage indexation holds ratio of average pension to average wage constant • Recent move toward price indexation or partial indexation, to cut costs (Sweden) • Indexation pushes income to later life • Trade-off: Indexation, espec. if to wages, costs a lot, but also provides valuable insurance & redistributes to old-old

13. Indexation protects the old-old and groups with greater exp. longevity • Indexation financed by common pool redistributes to groups with greater ex ante expected longevity (women) • Pushes pension resources toward very old age • Prevents relative poverty in very old age • Raises return and work incentives for women • Any downgrading of indexation saves money but hurts very old women disproportionately • Swiss (mixed) indexation a good compromise; especially important for safety net

14. Treatment of women in divorce • Divorce is very common, espec. in U.S., Europe • Varied treatment of divorced women • They lose consumption financed by husband’s pension but may have small own-pension • Sometimes they get no survivors’ benefits (L. Am., M. East, some E. Europe) but get 100% in U.S., partial in W. Europe • Important to consider DB and retirement saving as common property at point of divorce

15. Should unisex tables be required? • Which risk categories are allowed for pricing? • Assumes same mortality rates for M and W • Implicit in DB plans if same monthly payout • Explicit decision needed in DC plan • Gender-specific tables=>lower m. payout to W • Unisex redistributes lifetime income from M to W • Poor men lose most, rich women gain most • Raises return to women so may encourage their work and contributions (and vice versa for men) • Changes payouts by 7-8% for individuals, but only 2-3% if joint annuities--issue disappears Their 15

16. Conclusions: problems • Old policies protect married women in traditional roles but discourage women’s work • Earlier retirement age for women reduces their training, wages, pensions, contrib. to GDP • Safety nets protect low earners but high tax on work (phase out, subsidy to non-working wives) • Survivors’ benefits help widow(ers) maintain living standard, costly, give favored treatment to non-working married women but penalize their work • New policies cut distortions, still discourage work, reduce protection to old-old women • Survivors’ benefits cut and indexation downgraded

17. Solutions from various countries • Equalize (and raise) retirement age—shift pension flows and subsidies to old-old age • Flat benefit or high threshold for phase-out • Don’t finance survivor benefits from common pool • Instead, mandate joint family pensions, financed by spouses; widow(ers) retain own + survivor’s pension • Consider pensions part of family wealth in divorce • Use indexation, pension jump or deferred annuities that push retirement income into very old age • Unisex requirement makes little difference in context of joint pensions