Gender Issues in NDC Plans By Estelle James Prepared for the conference on NDC plans, December 2009

Why gender issues? Some ss provisions are gender-specific (e.g. retirement age in some countries) More generally-Men and women have different employment histories, earnings, marital situations and expected lifetimes therefore same provisions affect M & W differently These differences should be taken into account in designing and fine-tuning NDC plans 2

Similar gender issues in DB, FDC and NDC plans. But: DC plans must make explicit some decisions that were implicit in DB plans – Payout termsmandatory annuities, indexation, unisex – redistributional goals and arrangements (safety nets, survivors benefits and possible use of unisex tables) – more transparent but politically difficult NDC plans avoid some FDC problems – decentralized investment--gender differences re investment choices and returns (risk aversion) – Decentralized annuities--insurance co. & unisex NDC theory vs. implementation. Inherent vs. discretionary. I focus on implemented NDC. 3

4 issues: Retirement age, safety nets, payout terms, benefits for survivors and the very old No economic reason for lower RA for women Redistributions to women via guaranteed minimum, child care credits and unisex requirements But many women are insulated from NDC ethos of work incentives and personal responsibility because of safety net. How much protection v. incentives? Position of very old women and widows will fall relative to income of young-old and of current workers, because of price indexation of annuities & min. pension and cutbacks in survivors benefits. – how much front vs. back-loading of payouts? – should joint annuities be considered?

1) Retirement age DB plans were often actuarially unfairpenalized continued work, incremental contributions and postponed age of pension No penalty for early retirement, so many workers retired at earliest allowed point (Gruber & Wise) DC plans designed to make plans actuarially fair: EPV constant when pension postponed & EPV of incremental contrib. = EPV of incremental benefits Incentive to work longer; and workers respond (Gruber & Wise, Disney & Smith, Song & Manchester, Edwards & James). So why not let workers decide their own retirement age? 5

Reasons why retirement constraints are still needed Myopiaworkers have high discount rate DC plans are still partially unfair actuariallyworkers must save more then preferred, withdrawals inflexible, NDC r < capital market rate, safety net immunizes many workers Especially unfair to men if they want higher risk and if unisex tables are required So workers may retire too early for adequate pension and may impose burden on safety net Normal and early retirement constraints still needed to ensure adequacy, avoid poverty, cut burden on safety net that sets pension floor 6

Should lower retirement age (RA) be allowed for women? In many DB plans women have lower RA without lower monthly pension In DC plans women get lower monthly pensions if lower RA: 5yrs=30-50% No reason for difference, if adequacy, poverty avoidance and low fiscal burden are goals Maybe womens RA should be higher than mensgreater longevity Most OECD countries moving toward equality Not controversial economically but very controversial politically (e.g. Poland, Chile) 7

2) Safety nets NDC plans tie B to C, so non-contributors and low- contributors get small pensions. Many women work, earn and contribute less Remedies: Old age support may come from family; system may grant maternity, child care and survivors benefits; retirement assets can be split upon divorce. But may be insufficient to prevent old age near-poverty Safety nets for low earners included in old age systems – Sometimes embedded in DB formula – Must be explicit in DC plansshould it be pure flat, phased out flat, minimum pension? – for all residents or only for contributors? 8

Types of safety net benefits Flat (uniform) pension to all residents over 65 (Netherlands & NZ; Norway and Sweden before NDC) – Financed from general budget, redistributive, women gain, high cost, but non-distortionary Phased-out flat more commonpublic benefit falls as private pension grows to cut costs – Phase-out rate 100%, 48% Sweden, 80% Norway – Lower explicit cost but high implicit tax (48-80%) on beneficiaries. Work disincentive. – Women are biggest gainersin Sweden 68% of W pensioners, in Norway 50% of W & W are 88% of all safety net recipients – (These % may fall in future due to more womens work, guaranteed income not wage-indexed) – But womens market work may be discouraged. --9

Safety net contd In extreme, phased-out flat becomes pure min – no top-up if own-pension > floor. 100% implicit tax, but for smaller groupthose below minimum (Poland) – Higher implicit tax=> faster phase-out, fewer affected Should flat & min pension be for all residents or only for contributors? (Sweden & Norway vs. Poland & Latvia). – If contributors, how many years for eligibility? – How many tranches? – More women gain more from residence-base but more costly, greater disincentive. NDC incentives dont apply to large % of women who get minimum top-up 10

3) Payout issues Is annuitization mandatory? – important for women, because of greater longevity, smaller voluntary savings, husbands may control family assets – implicit in DB, explicit in DC – no in Australias FDC, yes, in NDC countries Should annuities be joint? fixed? variable? – NDC countries could give choice but dont Are unisex tables required? Assumes same mortality for M&W, equalizes monthly pensions – changes payouts by 7-8%, only 2-3% if joint annuities – redistributes to women (incl transfers from poor men to rich women) – raises return to womens contributions so may incentivize their work (and vice-versa for men) – implicit in DB schemes but difficult to implement in FDC – Easier to implement in NDC; required in NDC countries.

Should annuities be indexed? To P or W? Price indexation holds real value of pension constant Wage indexation: pensioners keep up with workers Costly to system if financed by common pool in DB In DC, lifetime costs constant but wage indexation shifts resources to very old age and to individuals in annuity pool who grow very old With unisex, redistributes to women, who are old-old In DB price indexation common; in FDC price indexation difficult & wage indexation not feasible In NDC indexation varies. Price indexation most common. Relative position of very old women will decline unless some jump-up or indexation. 12

4) Survivors benefits Women outlive husbands, become widows. Smoothing consumption over life cycle should include widowhood and very old age as another long life stage for women In traditional family, husband supports wife, family income is cut by > 50% when he dies. But cost of maintaining living standard for widow falls by only 30% due to hh economies of scaleas in safety nets Families are myopic, dont save and insure enough. Survivors insurance smooths living standards, prevents near-poverty among widows. DB planssurvivors benefits common, costly, penalize womens work (women must give up own-pension to get survivors benefits), subsidize single-earner families – recent cuts in E. and Central Europe & NDC countries 13

Joint annuities as survivors benefits FDC plans in Latin America require husband to purchase joint annuities. Financed by spouse, not common pool. Widow keeps survivors + own- pension. Maintains her standard of living, doesnt penalize work or increase fiscal burden Provides family co-insurance for both spouses Joint annuities & contribution-splitting not required or even allowed in NDC countries. Should NDC countries reconsider? Should they encourage joint pensions as family co-insurance? 14

Conclusion (1) Compulsory annuitization, unisex tables, safety nets in NDC countries favor women But some NDC arrangements hurt womenno increase in real pensions as they age, shift from flat to min pensions with phased-out benefits and changing policies toward survivors Survivor benefits in NDC countrieseliminated or remain only in DB pillars. Ignore hh economies of scale, penalize womens work. Joint annuities not allowed. Inconsistent with NDC work ethos and individual responsibility. Relative position of very old widows will decline. 15

Conclusion (2) Flat & min pensions protect women but 50-80% implicit tax discourages womens market work. Many women excluded from NDC incentives. Reducing implicit tax from safety net and survivors benefits, encouraging joint annuities, and shift in resources toward very old age would induce women to support themselves and maintain relative position of very old women Women with strong labor market attachment may gain most from C-B link and unisex requirement, bottom half may remain financially dependent and lose position when very old. 16