The Gender Impact of Pension Reform—What Is It and Why?

1. The Gender Impact of Pension Reform—What Is It and Why? by Estelle James Presented at University of Lund, September 2006

2. What is the impact of pension reform on women vs. men? • Recent pension reforms in Sweden, Eastern Europe and Latin America include 2 pillars: • Individual accounts that link benefits more closely to contributions and are fiscally sustainable • Public benefit that provides safety net • Critics argue that close B-C link hurts women compared with old PAYG DB systems • We studied this empirically in Chile, Argentina and Mexico and found positive impact on women—with caveats • Similar studies done in Sweden, Poland—with different results. Why? What policies?

3. Why the gender difference in pensions? (labor market) • Low labor force participation rates, more household work • Women work half as much as men, in L.Am. • Often part-time work • • Low wages (2/3 as much as men) • • So if benefits depend on contributions and contributions depend on wages and work, women get low benefits.

4. Why gender differences? (demography) • Women live 3-5 years longer than men and are younger than husbands, become widows • Household income may fall dramatically, yet expenses only fall by 30-35% (household economies of scale) • Husbands often make financial decisions, don’t save and insure enough for wives • Very old widows often pockets of poverty

5. Impact indicators • How do monthly and lifetime pensions for men and women compare in new system? • Are replacement rates (pension/wage ratios) higher for men or women? • Does public benefit increase gender equality? avoid poverty? incentivize work? • Did gender ratios rise or fall due to pension reform? Who gained (or lost) the most? • Which design features produced these results?

6. Features of new systems in Chile, Mexico and Argentina • All have individual accounts • annuities encouraged, gender-specific tables • All have redistributive public benefit • Chile-minimum pension guarantee (27% av. wage) • Argentina-flat benefit (20%-30% av. wage) • Mexico--social quota (flat payment into account per day worked) + minimum pension • Husbands must purchase joint pensions • survivors benefit not financed by treasury • widow keeps joint + own pension—no work disincentive • Retirement age 65 for men, 60 for women (in Mexico 65 for M and W)

7. Our methodology • Problem--New systems don’t have retirees yet, benefits in old systems were unsustainable, no longitudinal data • We constructed synthetic work histories of representative men and women using household survey data that give wages and work experience by age • 3 different degrees of labor market attachment: average, full career and 10 year women (women of future are like FC) • Men and women in 5 different educational groups • Based on histories, we applied rules of new and old systems to simulate future benefits

8. Major answers to questions: 1) gender ratios in new system • Women’s pensions from own account are only 30-40% those of men—very unequal, poverty? • Goes up to 50% if retirement age raised to 65, like men • Public benefit adds disproportionately to low earners (mainly women) • Joint pension raises lifetime benefit of married women 15-20% points—not a tax cost • So average married woman gets 70-80% as much as men over her lifetime • Full career married women get more than men • Must take all parts into account

9. Gender ratios trebles due to public benefit, joint pension, more work

10. Own annuity <50% total lifetime pension for women; joint annuity>public benefit

11. 2) Replacement rates (pension/wage) of men v. women • Tells us if retiree can maintain standard of living • Women’s replacement rates 40-60% those of men, because they work and contribute less • >60% if public benefit is included • Women have higher replacement rate than men, if compared with actual annual earnings (adjusted for partial work)--most relevant definition • Also > men for full career women (flatter age-earnings profiles) and for widows when they get joint annuity

12. 3) Impact of public benefit depends on its design: equality v. incentives • Targeted to low earners, especially women, but different sub-groups benefit the most • Different trade-offs between poverty prevention, equality, work incentives • MPG (Chile) prevents poverty at bottom end • But if < 20 years service not eligible—low coverage • Encourages work for 20 years, then discourages • Social quota (Mexico): work incentives • Flat benefit (Argentina--after 10 yrs): • Equalizes across genders, prevents poverty, subsidizes non-working women but doesn’t incentivize work

13. Low earners, especially women, get largest % increment from public benefit

14. Pension of full career woman/10-year woman: Argentine flat benefit does not reward work

15. Indexation crucial: Wage- indexed MPG has larger impact than price-indexed MPG

16. 4) Did women’s position improve in new system? Which women? • Women were big gainers, especially: • Low earners (low education) due to public benefit • Married women--keep joint annuity + own pension • Full career women—benefit-contribution link (future women) • Mixed results for: • 10-year women--low own pension, sometimes not eligible for public benefit • Single women—no joint pension • Single men also gained because they don’t have to pay tax to finance widow’s benefit • Financed by lower payout to husbands

17. Different impact in transition economies (East & C. Europe) • Wage inequality is growing, so accounts unequal • Public benefits less targeted toward low earners • Survivors’ benefit reduced to save money • Policies re joint annuities not yet clear • Many single and divorced women • Earlier allowable retirement age hurts women more in new systems • Therefore new systems appear to increase gender inequality in pensions in transition economies • Details of plans matter a lot

18. Comparisons with Sweden • Women’s position is better because they work more and earn higher wages • But new system does not require private joint pension and public survivors’ benefits are small, so standard of living falls when partner dies—lower pension, household scale economies, household wealth used up • Switch from flat benefit to minimum pension=>women get less in new system • Minimum pension price-indexed—will fall over time relative to average standard of living unless wage-indexed

19. Summary: key features for women • Targeting public pillar subsidies to low earners • more targeted in new Latin American systems than in old Latin systems or in US, helps women • flat benefit equalizes more than MPG but costs more and offers less work incentives • Price versus wage indexation • a gender issue because women live longer • price indexation maintains real value of pension • wage-index safety net to maintain relative value (since wages grow faster than prices)? Otherwise very old women will be poor compared with workers • Equal retirement age for M and W • helps equalize pensions. • earlier retirement hurts women more in new systems • should women work longer because they live longer?

20. Key features cont’d: Joint annuity requirement • Protects widows and non-contributing women at no cost to public treasury • Maintains implicit family contract and co-insurance between partners • Important for women to keep own+joint pension (work incentives) • Under joint annuity, unisex vs. gender-specific mortality tables yield similar payouts • Survivors benefits are being downsized in Europe, including Sweden, but this will hurt older women, even if work, wages and pensions are equalized