Work Disincentives for Women in Old Age Security Systems (and how to ameliorate them)

1. Work Disincentives for Women in Old Age Security Systems (and how to ameliorate them) By Estelle James Prepared for the World Bank, June 2010

2. Many old age security rules are based on traditional social norms • Traditional norms—women married young, had children, stopped work, husbands supported them, divorce rare. Old age systems perpetuated this norm. • Current situation—many women don’t marry or work after marriage, have fewer children, divorce common • Still, women tend have lower LFP than men, earn lower wages, live longer and become widows • Greater range of acceptable behaviors. So incentives from ss system matter more. Some old age system rules helped in the past but hurt today: penalize women’s work, make it difficult for them to attain financial independence and add to economy’s productivity.

3. I discuss: • Gender-specific rules—Example: earlier allowable retirement age (RA) for women • Rules that are no gender-specific but affect men and women differently because of women’s lower earnings and longer lifetimes • Safety nets that are phased out—high implicit tax for low earners that discourages their work • Survivors benefits—protect widows but require them to choose between own and widow’s pension • Other provisions that shape distribution but have little impact on work—compulsory annuitization, unisex requirements, indexation rules

4. Earlier statutory RA for women • Women are often permitted to retire earlier than men (Why? compensate for 2 jobs? Coordinate RA with husband?) • High income countries—RA’s being equalized • Asia, Africa, parts of LA—3-5 year difference (China 60M/50-55W) • E Europe &FSU—women live 4-5 years longer than men but retire 3-5 years earlier—retirement period 8-10 years longer (Poland le at 65: 14.5M/18.8W, RA 60W/65M) (Should be opposite?)

5. Consequences: Earlier RA reduces women’s pensions, espec. in DC system • DB systems: • Workers usually retire as soon as they can because systems not actuarially fair. Postponing doesn’t raise monthly pension. Pension does rise somewhat for more years of work, but not as much as contributions rise • Lower RA=>Fewer years work, lower pension and living standard for older women than for men • But EPV of lifetime pension is higher because paid more years—higher fiscal cost to govt • So W. European govts now raising & equalizing RA

6. Consequences (2) • DC systems • Accumulated savings converted into annuity on actuarially fair terms so monthly pension falls ir pension starts sooner and EPV doesn’t rise • No fiscal burden for govt but much lower living standard for old women. • Chile: RA65M/60W, women’s pensions 33% of men’s; would be 50% if pension age were 65 and more if women worked during 60-65 • Both DB & DC—other effects of earlier RA: • Cuts off high wage years, promotions, job training • Lower wages and pensions for women, less productivity and output for economy • Yet women resist change—need more information

7. Safety nets: trade-off between poverty alleviation & work incentives • Non-contributory flat and minimum pensions , redistribute to low earners (disprop. women) • Start at 20-30% average wage, usually phased out as own-pension grows, at 15-100% rate • Phase-out rate is implicit tax on work, discourages longer work by low earners (women) • Ex: Australia’s flat is 25% av. W, phases out at 40% rate, 80% elderly get some flat, wide implicit tax • S Africa—flat cuts poverty, reduces women’s LS • Chile’s MPG had 100% implicit tax, switched to 29.4% phase-out—smaller disincentive but hits much broader group (65% of elderly)

8. How to reduce trade-off • Pure flat, no phase-out (Netherlands, New Zealand, Bolivia, Kosovo, Botswana, Nepal--start later to control cost ) • Contribution requirement for eligibility (Argentina—but many women not eligible) • Higher minimum pension for longer years of work (Switzerland, Czech Rep, Latvia, Norway) • Flat benefit per day or month of work (Mexico) • Credits for years of child care (Europe) • Poverty prevention needed for older women, but not at expense of own work, financial support, contribution to broader economy

9. Survivors’ benefits • Most older women become widows and most widows(ers) are women—their income falls, poverty • Most DB systems provide survivors benefits to protect widows—50-80% of husband’s benefit • But work disincentive—women must give up own-benefit to get widow’s benefit—her contribution is pure tax. Also phased out against wage. Evidence this causes women to work less • Other problems—high fiscal cost, inequitable cross-subsidies (from singles to marrieds, dual career to single career families, poor to middle-income) • Many countries (E. Europe, Nordic, & FSU) now cutting survivors benefits, expect women to work—eliminates problems but ignores hh economies of scale, leaves many widows with low living standard

10. Alternative: joint annuities in Latin American DC systems • Each spouse is required, upon retirement, to purchase joint pension that covers widow(er) • Reduces primary benefit 15-20% • Implements implicit contract of mutual support, doesn’t pass cost on to others, eliminates fiscal burden, cross-subsidies • Widows keep own-pension + joint pension so work disincentive disappears, hh econ of scale solved • Chile—joint annuity is over 60% of monthly income of widows, raises women’s EPV by 40%, increase incentive for women to work

11. Other ss features that redistribute to women • Mandatory annuitization • Unisex mortality tables requirement • May lead to adverse selection, creaming, has smaller effect on income than joint annuities, very little impact in context of joint annuities • Wage indexation of benefits with unisex—shifts pension income to longer lived, who are women • Contribution-splitting • These give higher return to women’s work, lower return to men—redistributes but probably has little impact on work over-all

12. Conclusion • Many features of old age systems that help women in traditional roles, hurt them today when women have choice of work— • earlier RA • flat benefits or minimum pension with phase-out • survivors benefits that displace own-pension

13. Solutions • Avoid system rules like differential RA that signal lower work expectations for women • Avoid high phase-out rates and wide ranges in safety nets. Use pure flat that starts later or give higher minimum for longer work • Finance survivors’ benefits within family, by mandatory joint annuity, and let widow keep own+ widow’s pension • Implement pension literacy programs that help women make informed choices about work and pension age, and collect data on their actual RA • This will move us toward better financial security for women—from their own work—and higher income/output for broader economy

14. How to reduce trade-off • Women are main subjects of implicit tax so their work is discouraged unless trade-off is reduced • Pure flat, no phase-out (Netherlands, New Zealand, Bolivia, Kosovo, Botswana, Nepal) • Higher age or low benefit to control costs • Contribution requirement for eligibility (Argentina)—but many women ineligible • Higher minimum pension for those who work more years (Switzerland, Czech Rep, Latvia) • Flat benefit per day or month of work (Mexico) • Credits for years of child care (Europe)