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

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--todays systems may be appropriate for women of yesterday but not for women of tomorrow; re-evaluation needed Also, rethinking needed in DC context 2

Why does social security affect men and women differently? Some rules are gender-specifice.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 longevityso lifelong pension, annuitization, indexation more important – Become widowssurvivors benefits important

But these differences are changing When ss started, strong social norms determined womens rolesmarried young, many children, divorce rare, low lfpr Nowwomen 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

Women are varied group Important to bear in mind that all women are not the sameearlier 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 werent 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 5

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? 6

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)

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 7

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, dont 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 husbands benefit to widows (100% in U.S.)

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 survivors benefitdiscourages 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 50%, so widows living standard must fallfor long period – Less protection for old-old women 10

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 widows standard of living – Widow keeps own pension + joint benefit so doesnt penalize work (lfpr rose) – Symmetrical for men & womenfamily insurance – Could be adapted for DB in social security

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 12

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 13

Treatment of women in divorce Divorce is very common, espec. in U.S., Europe Varied treatment of divorced women They lose consumption financed by husbands 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 14

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

Conclusions: problems Old policies protect married women in traditional roles but discourage womens 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 16

Solutions from various countries Equalize (and raise) retirement ageshift pension flows and subsidies to old-old age Flat benefit or high threshold for phase-out Dont finance survivor benefits from common pool – Instead, mandate joint family pensions, financed by spouses; widow(ers) retain own + survivors 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 17