Elsa Fornero University of Turin and CeRP (Centre for Research on Pensions and Welfare Policies)

1. Elsa Fornero University of Turin and CeRP (Centre for Research on Pensions and Welfare Policies) Women’s Economic SecurityOld Challenges and New Threats after the Financial Crisis International Conference and Expert Meeting on THE GLOBAL FINANCIAL CRISIS – IMPLICATIONS FOR WOMEN Haifa, Israel, 8-12 November 2009

2. Adequacy of saving for old age(for women in particular) Questions: What will be the consequences of pension reforms, on the one hand, and of the financial crisis, on the other, on the adequacy of retirement provisions? How will households’ savings respond to changes in pension provisions? How can household “preparedness” for retirement be improved? What can policy do to improve saving choices? While these questions are general, understanding how women fare in these respects is of crucial importance Elsa Fornero - November 2009

3. Unfavorable demographic trendsEvolution of the dependency ratio by country Source: Visco, I. (2006), “Longevity risk and financial markets”, keynote speech to the 26th SUERF Colloquium, Lisbon Elsa Fornero - November 2009

4. Gender differences in life expectancy at 60 (2000-05) Mali Israel India China UK Germany Italy France Years 0 5 10 15 20 25 30 Life expectancy at age 60 is the additional number of years expected to be lived by a woman or man who has survived to age 60. Source: United Nations Elsa Fornero - November 2009

5. Employment rates, 2004 Source: ILO (KILM 2009) Elsa Fornero - November 2009

6. Earnings ratio Ratio of female to male earned income, 1996-2007 Norway China Israel Poland Italy Tunisia % 30 40 50 60 70 80 Source: UNDP, Human Development Report 2009 Elsa Fornero - November 2009

7. Assessing adequacy of retirement provisions Individual dimension: sensible allocation of resources in the life cycle, given market and institutional context the life cycle model is the natural benchmark Pension system dimension: A well structured institutional design, financially sustainable, for an efficient risk management,contemplating: risk diversification and sharing bothwithinand across generations, as well as across genders a mixed system, combining different financing methods (public PAYGO and private funding, through financial markets) enhancement of individual responsibility,through information and education appropriate design of workers’ choice situations, e.g. default options a few guarantees, sheltering individuals against uninsurable risks Elsa Fornero - November 2009

8. A life cycle perspective 1.Consumption smoothing 2.Prevention of poverty in old age 3.Maintaining a compact between generations and genders Elsa Fornero - November 2009

9. Real life is far more complicated • Illiquidity (house) • Imperfect annuity mkt • Investment risk • Longevity risk € W • Bad health outcomes • Economies of scale in hh • Home production • Work-related expenses Y C • Household composition • Children in & out • Divorce • Imperf indexation • Progressivity P Early ret (health or job shock) Ret Age Elsa Fornero - November 2009

10. Do women face higher retirement risks? • Higher longevity • No evidence of a significant gender difference as for myopia/time inconsistency • Higher earning risks, because of lower, more fragmented and weaker participation in the labor market • Less investment in women’s human capital education and health Economic and demographic risks fall more heavily on women? Elsa Fornero - November 2009

11. New perspectives in pension systems design In the last 10-15 years, the emphasis has shifted from redistribution to insurance from the state to market and individual responsibility from entitlements to incentives as a way both to strengthen the financial sustainability of the system and to reduce distortions in households’ savings and labour decisions. Elsa Fornero - November 2009

12. Impact of pension reforms Although different countries have followed different reform paths, pension promises in general have been downsized retirement ages have been raised replacement rates have been reduced benefits have been de-indexed from wages to prices the link between individual benefits and contributions has been strengthened Over time, reforms will reduce the relative importance of the first pillar replace DB with DC schemes, based on financial accumulation and (possibly) on actuarial principles strengthen the role of occupational and personal plans, where workers have greater choice, responsibility and risk ► Pension reforms will affect saving adequacy, particularly in the future, when the decrease in public pension benefits will become apparent Elsa Fornero - November 2009

13. From family to individual The strengthening of the principle of actuarial equivalence induced by the introduction of (notional or actual) funded pillars moves the focus of policies from the family to the individual The focus on the family had the advantage of providing an insurance to its members with limited resources, but at the price of a lower independence of women ….and greater risks because of their reduced access to “regular” paid work Elsa Fornero - November 2009

14. Have reforms been friendly to women? The emphasis on the individual introduces important labor market incentives and stresses women’s role as persons rather than as wives/widows, i.e. through pension crediting for care periods However, most women are far from being able to build careers supporting an adequate pension level, given the family and social tasks they are still largely expected to perform They are also more exposed to financial risks Elsa Fornero - November 2009

15. Women’s pension entitlements • Elderly single women are at greater risk of poverty than aged couples and the share of elderly women living alone is expected to increase substantially due to population ageing and women’s longer life expectancy • The so-called “derived-rights” – survivors’ benefits, spouse benefits, etc. – have traditionally been a very important source of income for women in old-age – especially for elderly women living alone • This can be problematic: • The move toward increasing actuarial fairness may disproportionately damage women, due to their weaker attachment to labour market • Derived rights (but also lower retirement ages for women) are an ex-post remedy that does not solve the real problem: lower participation rates, discontinuous careers, lower wages • Source: Monticone, Ruzik, Skyba (2008), Women’s pension rights and survivors’ benefits. A comparative analysis of EU Member States and candidate countries, ENEPRI RESEARCH REPORT NO. 53 Elsa Fornero - November 2009

16. Impact of the financial crisis The recent financial crisis has called into question the very grounds of pension reforms in most crises, in particular the «risk diversification» rationale for creating a privately funded pillar, based on financial returns, alongside the public one, established on an intra-generational pact The problem is whether conditions exist for financial markets to become a significant, profitable and sustainable complement to the public system Trust and reliability features in supplementary pensions should be strengthened, and individuals (workers/families) should be enabled, also through programs of financial education, to take adequate and informed decisions on the accumulation of retirement saving While improvements are also desirable in asset management techniques, benefit guarantees, their structure, cost and burden can no longer be neglected While the crisis is a cause of serious distress, it can also be a source of new opportunities, not to be missed. This would indeed happen if a pure and simple return to the past social security model should prevail. Elsa Fornero - November 2009

17. Preferences, discrimination, or simply ignorance? A poor working history may not be the only reason behind women’s lower pension income Other candidate explanations are the following: Are women more risk averse? This is debated, but if it were true it would have implications for retirement wealth they also appear less confident, and certainly not overconfident are they more discriminated in the credit market? Alesina et al. (2008) show that in Italy self-employed women and micro-firms owned by women pay higher interest rate than men on overdraft facilities, controlling for their riskiness Women appear to have lower financial literacy (Lusardi and Mitchell 2006). Even though the reason is clearly rooted in culture/tradition rather than in cognitive abilities, it has key implications for retirement wellbeing Elsa Fornero - November 2009

18. Financial literacy It has become clear that individuals have a hard time planning ahead and making long term financial decisions Financial illiteracy is probably an important reason. Those who are not literate are less likely to plan and to accumulate wealth, and more likely to borrow, using high cost instruments Women (and other demographic groups) appear to have a lower understanding of basic notions concerning risk and savings management. Risk illiteracy is particularly relevant Lack of knowledge could be inconsequential if knowledge had little effect on behaviour or if households relied on experts’ advice. Most individuals - particularly those with low financial literacy - rely on family and friends. Women too are more likely to rely on informal advice Elsa Fornero - November 2009

19. Policy Options: opportunities vs compensation Elsa Fornero - November 2009 Aiming at reducing women’s disadvantages in the family and in the market place • Invest in human capital (health and education) • Help for child care • Remove barriers in the labor market and improve job opportunities • Reduce the dependency of benefits from either the husband (family dependence) or the state (political dependence) • Encourage sharing in family duties (i.e. “parental leave”) • Recognize “care activities” • Reduce discrimination in the labor market • Target policies to protect widows, and survivors in general • Encourage retirement savings (tax incentives, financial education, transparency and effective supervision of financial markets) • Use uniform life tables to calculate public annuities (?)

20. Concluding remarks Both pension reforms and the financial crisis are putting more risks on women's economic security in old age There is a crucial trade-off between a view that advocates actuarial fairness without any kind of redistribution and another one that incorporates principles of social justice into the system, thus attributing to pension systems a major role in poverty reduction and resources reallocation Corrections are to be found in a better regulations of financial markets, in financial education and in the provision of some guarantees in the public system However, if inequality is not reduced in employment and in household tasks, then the permanence of compensatory measures in pension systems become justifiable, in spite of the distortions they induce by loosening the link between contributions and benefits. Elsa Fornero - November 2009

21. Elsa Fornero - November 2009