TheWorld Bank A p r i l PREMnotes 2 0 0 4 n u m b e r 8 5 Gender Gender-differentiated impacts of pension reform Pension reform can have a positive or negative impact on the gender gap in pension benefits. This note uses examples from Latin America and Eastern Europe to illus- trate how gender outcomes depend on the combined effect of changes in pension design features. Many countries have initiated pension reform person versus benefits financed by a broader to cope with aging populations and fiscally revenue pool. Table 1 shows the interactions unsustainable pension systems. The reforms between types of entitlements and sources of often aim to separate the safety net and savings benefits, and illustrates how these interac- Gender issues functions of pension systems, and to minimize tions result in different types of transfers. incentive distortions. They usually involve mov- arise in pension ing from a single public pillar to a multipillar Which pension design features system, with the latter consisting of a private affect gender outcomes? design because pillar (with defined contributions) and a more Six pension design features are of particular targeted public pillar (with defined benefits). relevance to gender-specific outcomes: retire- men and women Gender issues arise in pension design be- ment ages of men and women, redistributive cause men and women have different employ- benefits, caring credits, survivor benefits and have different ment histories and life expectancies. Women joint annuities, unisex versus single sex annu- tend to have shorter histories in the formal ity tables, and indexation. employment labor market because they take time off to care for children and are permitted to retire ear- Retirement ages histories and life lier than men. During their working years they Raising and equalizing the legal retirement also earn less than men, on average (World ages of women and men can have a significant expectancies Bank 2001). As a result, women contribute less positive impact on the level of female bene- to pension systems than men, and are likely fits, particularly in a defined contribution pri- to end up with smaller pensions if benefits are vate pillar. Simulations for Argentina and closely linked to contributions--as in the Chile show that raising women's retirement defined contribution pillar of new systems. age from 60 to 65 would increase the average However, the public pillar in new systems often monthly benefit of women by 50 percent and includes a safety net that provides a public narrow the gender gap in benefits by 10­15 transfer to women. percentage points (James and others 2003). When discussing gender, pensions, and Equalizing retirement ages also reduces the transfers, it is useful to distinguish between public transfer toward women and makes labor individual pension entitlements (based on market incentives more equal. one's contributions or residency) versus derived entitlements (based on one's rela- Redistributive benefits tionship to another person with pension en- In many countries, old-age poverty is con- titlements), as well as between benefits that centrated among women. As such, redistrib- come from contributions from a specified utive benefits--such as a minimum pension from the development economics vice presidency and poverty reduction and economic management network Table 1 Interactions between types of entitlement and sources of benefits Types of entitlement Sources of benefits Individual Derived Own or spouse's contributions No transfer Private transfer (Example: own annuity) (Examples: survivor benefits based on joint annuity purchased by spouse) Pooled funds Public transfer Public transfer (Examples: minimum pension (Examples: survivor benefits guarantee, caring credits) beyond spouse's contributions) guarantee or flat benefit--play a particularly Survivor benefits and joint annuities crucial role for women. Simulations suggest Entitlement to survivor benefits or joint that topping up benefits in defined contri- annuities can go a long way toward improv- bution schemes through a minimum pen- ing pension benefits for women--including sion guarantee or flat benefit can strongly women who have never worked for wages. reduce poverty among retired women In Argentina and Chile, survivor benefits (World Bank 1994). In Chile, adjusting are guaranteed by requiring married men women's pensions with a minimum pension to take gradual withdrawals spread over their guarantee raises their benefits from 32 per- own and their spouse's lifetimes, or to pur- cent to 39 percent of average male benefits chase joint annuities that effectively redis- in the lowest education bracket (James and tribute income from men to women at the others 2003). At the same time, the level of household level. The rationale is that women a minimum pension guarantee can raise worked in the market less than men in order an incentive issue. If women's pensions fre- to work at home, so their husbands should quently fall under the level of the guaran- compensate them for this home work in old tee, young workers with low contributions age. Mandatory joint annuities had the will have little incentive to increase them largest positive impact on the female-male (Falkingham and Rake 2001). ratio in lifetime pension benefits in Argentina and Chile, bringing it up to 60­80 Caring credits percent (James and others 2003). However, Most transition economies used to offer pub- joint annuities will not reduce old-age lic pension credits during maternity leave and poverty among single women or women who the early years of childrearing, but many are do not have access to survivor pensions due eliminating these credits as part of the to divorce. reforms. Maintaining these credits can miti- gate the post-reform widening of the gen- Unisex and single sex annuity tables der gap in benefits. However, state-financed Worldwide, women live longer than men. caring credits involve a public transfer toward Hence, the level of female benefits will dif- women, increase the cost of the system (often fer depending on whether single sex or uni- in a nontransparent way), and create a dis- sex annuity tables are used. Use of unisex incentive to continue participating in the for- tables implies a transfer toward women since mal labor market during the years of caring. they live longer than the unisex average. This Another way to compensate women for chil- will decrease the gender gap in benefits. Sim- drearing is by providing private transfers at ulations for Poland show that using unisex the household level. This can be done either tables instead of single sex tables decreases by encouraging family contributions to the gender gap in benefits by 6­8 percent if women's pension accounts during periods of individual annuities are purchased (Bal- child care or by introducing joint annuity cerzak-Paradowska and others 2003). If joint requirements (see below). annuities are purchased, however, the use of PREMnote 85 April 2004 unisex tables makes little or no difference of both spouses. (In Mexico, this require- because both male and female expected life- ment applies to both spouses.) times are taken into account in the annuity · Widows are allowed to keep the joint annu- calculation--hence, the joint annuity is vir- ity benefit as well as their own benefit. (In tually unisex (James and others 2003). Argentina and Chile, women previously had to give up their own-pension in order Indexation to get the widow's benefit, so their con- Without indexation the future value of pen- tributions gave them practically no return.) sion entitlements can be considerably lower The net effect of these changes is posi- than expected at the time of contributions, tive for women, bringing average lifetime especially in countries with high levels of benefits for married women up to 70­90 per- inflation. Indexation of public and private cent of male lifetime benefits, and benefits Pension reform may pillar benefits is particularly important for for married "full career" women up to 100 women because, on average, they live longer percent of male benefits. Pre-reform female improve outcomes than men. lifetime benefits were 59­89 percent of male lifetime benefits in Chile, and 26­81 percent for women who work Examples of pension reform of male benefits in Argentina (James and oth- Whether pension reform improves gender ers 2003). in the labor market equality depends on the combined effect of In contrast, women in the transition economies changes in all of the features discussed of Eastern Europe and the former Soviet most of their adult above. It also depends on women's ability Union seem to have fared less well with pen- and willingness to respond to the economic sion reform--illustrating how gender out- lives, while causing incentives built into the new pension sys- comes depend on the situation prior to tem. Thus, pension reform may improve out- reform, the design features of the new system, a deterioration comes for women who work in the labor and the extent of equality of opportunity in market most of their adult lives, while caus- the labor market. The old systems in transi- for others ing a deterioration for others. tion economies were usually very generous The pension reforms implemented in toward women. They encouraged women to Argentina, Chile, and Mexico provide a good retire early, provided them with high replace- example of how gender outcomes depend on ment rates, and gave credits for childrearing-- the combined effect of changes in different resulting in a large public transfer toward pension features. Simulations of the results women. The new systems deliberately reward of pension reform show that in all three coun- longer careers and later retirement. In most tries and across most educational groups, both cases the public pillar is not very redistributive men and women gain--but women gain toward women, survivor benefits have been more (James and others 2003). In all three weakened, and the joint annuity is not countries, the biggest gainers are women with required. At the same time, the male-female low levels of education. wage gap has widened, women's work partic- Several aspects of the reforms were found ipation has decreased, and women continue to have gender-specific impacts: to retire earlier than men. As a result the pen- · Women's individual monthly pension sion gap between men and women has entitlements were reduced to 30­40 per- expanded substantially. cent of men's due to closer links between Simulations for Poland show that as a result contributions and benefits. of the 1998 reform, average yearly female pen- · Women have become the main recipients sion benefits will decrease from about 80 per- of the targeted redistribution through cent of male benefits in the old system to 45 the minimum pension guarantee or flat percent in the new (Balcerzak-Paradowska benefit. and others 2003. If unisex mortality tables · Married men are required to take out joint were used the new ratio would be 57 percent, annuities at the time of retirement or and if the retirement age were raised to equal spread gradual withdrawals over the lives men's the new ratio would rise to 73 percent. PREMnote 85 April 2004 The remaining differential is mainly due Further reading to wage disparities. By linking pension ben- Balcerzak-Paradowska, B., A. Chlon-Dom- efits more closely to contributions, pension inczak, I. Kotowska, A. Olejniczuk-Merta, reform in Poland has made labor market I. Topinska, and I. Woycicka. 2003. "The incentives between men and women more Gender Dimensions of Social Security equal and has made the system more efficient Reform in Poland." In E. Fultz, M. Ruck, and financially sustainable. At the same time and S. Steinhilber, eds., The Gender Dimen- however, labor market opportunities have sions of Social Security Reform in Central and become more unequal: the gender pay gap Eastern Europe: Case Studies of the Czech Repub- among the highest-paid workers increased lic, Hungary, and Poland. Budapest: Inter- 13 percentage points between 1985 and 1997 national Labour Organization. Gender-sensitive (Kotowska 1997), the unemployment rate Falkingham, J., and K. Rake. 2001. "Model- among married women is much higher than ling the Gender Impact of British Pension modeling of the average (Kowalska 2000), and women's labor Reforms." In J. Ginn, D. Street, and S. force participation has fallen (Balcerzak- Arber, eds., Women, Work and Pensions-- potential impacts Paradowska and others 2003). Unless com- International Issues and Prospects. Bucking- pensating changes are made, the new pension ham, U.K.: Open University Press. of pension reforms system will perpetuate this diminution of James, E., A. Cox Edwards, and R. Wong. labor market equality into old age. 2003. "The Gender Impact of Pension can prevent Reform: A Cross-Country Analysis." Pol- Gender-sensitive modeling of icy Research Working Paper 3074. World unexpected pension reform Bank, Washington, D.C. The evidence presented above indicates that Kotowska, I. 1997. "Equality of Women and increases in changes in retirement age or entitlement Men in the Labor Market." In R. Siemien- to survivor benefits can significantly increase ska, ed., Problems of Occupational Equality old-age poverty the ratio of female to male pension benefits. by Gender. Warsaw: Scholar Publishing Moreover, lower individual entitlements for Company. women in the defined contribution private Kowalska, A. 2000. "Women in the Polish pillar can be compensated by mandatory joint Labor Market." Studia Demograficzne 2/138. annuities and a redistributive public pillar. World Bank. 1994. Averting the Old Age Crisis. These conclusions point to the need for A Policy Research Report. Washington, D.C. gender-sensitive analysis prior to reform. Gen- ------. 2001. Engendering Development. A Pol- der-sensitive modeling of the potential icy Research Report. New York: Oxford impacts of pension reforms can prevent unex- University Press. pected increases in old-age poverty and reduce future reliance on social assistance. This note was written by Alexandra van Selm (Con- The World Bank's Pension Reform Options sultant, PRMGE and WBIHD) under the super- Simulation Toolkit (PROST) enables coun- vision of Susan Razzaz and Nayantara Mukerji. try teams to model detailed gender outcomes The author is grateful to Estelle James, Karen and explore the effects of modifications to Mason, and Cecilia Valdivieso for useful comments. the relevant design features. For more infor- If you are interested in similar topics, consider mation on PROST, contact Yee Mun Sin at joining the Pensions Thematic Group (contact Yee ysin@worldbank.org. Mun Sin, x37572). This note series is intended to summarize good practices and key policy findings on PREM-related topics. The views expressed in the notes are those of the authors and do not necessarily reflect those of the World Bank. PREMnotes are widely dis- tributed to Bank staff and are also available on the PREM Website (http://prem). If you are interested in writing a PREMnote, email your idea to Madjiguene Seck. For additional copies of this PREMnote please contact the PREM Advisory Service at x87736. PREMnotes are laid out by Suzanne Luft. Prepared for World Bank staff