The Impact of Social Security Reform on Women in Three Countries
Tuesday, November 04, 2003
by Estelle James, Alejandra Cox Edwards & Rebeca Wong
Table of Contents
- Executive Summary
- How Pension Systems and ReformsAffect Women and Men Differently
- Key Design Features of the Old and New Systems
- Women’s Gains from the New Systems
- Implications for Social Security Reform in the United States
- Appendix I: Methodology
- Appendix II: Relative Impact on Own-Annuities, Joint Annuities and Public Benefits
- About the Authors
The impact of individual accounts on women is likely to surface as an important issue as we consider Social Security reform in the United States. The experience of Latin American countries that have already adopted these reforms sheds light on how women will be affected and which design features are likely to produce desirable outcomes. This paper analyzes the differential impact on the two genders of pension reforms in Chile, Argentina and Mexico, which have adopted systems in which social security benefits are primarily financed by mandatory savings in individual accounts. We found that, in general, benefits of women improved relative to those of men, and low-income women were the biggest gainers from the reforms.
Social security can have different impacts on men and women because of economic and demographic differences between the two genders.
Less formal labor market work, lower wages for women. Although the labor force participation rate of women has been rising, it is still only 75 to 80 percent that of men in the United States, and the disparity is even greater in Latin America. In industrialized countries, the average hourly wage rate of women is 15 to 30 percent below that of men, and it is even lower in Latin America. These factors lead to smaller pensions for women in traditional defined benefit systems such as that in the United States and to smaller retirement saving accumulations in defined contribution systems, such as those in Chile, Mexico and Argentina.
Greater longevity and widowhood. Since women live two to four years longer than men in most countries and are typically younger than their husbands, women are more likely to become widows than men are to become widowers. In the United States, 34 percent of women aged 65 to 69 are widows, compared with 7 percent of men, and by age 85-plus only 9 percent of women (but 48 percent of men) are still living with their spouses. Due to household economies of scale, it costs one person about two-thirds as much to live as two. Yet household income is likely to fall to one-third of its previous level when the husband dies. This underscores the importance of survivors' benefits to women.
Poverty among very old women. With low benefits and without survivors' benefits, very old women become relatively poor in many countries.
To project how the two genders are likely to fare under the new systems in Chile, Argentina and Mexico, we used household surveys to construct the wage and employment histories of representative men and women in these countries. We then simulated what their pensions would be under the new and old system rules. Because the old systems were insolvent and unsustainable, their future benefits were uncertain. Therefore, instead of comparing the absolute dollar value of benefits, we compare the relative position of men and women with similar education under the new and old systems and the new-system benefits of women with differing educational levels and labor market experience. The major findings are:
- Women have generally gained under the new systems, relative to men.
- Women in the lowest educational categories are the biggest gainers.
- In Chile and Mexico, women who have worked a full career gain the most; but, in Argentina, women who spent much of their time working in the home receive the largest rates of return on their contributions.
The total pensions of women in these countries come from three sources: their personal accounts, public benefits that are targeted toward low earners, and the joint pensions that husbands are required to provide. These three together comprise the new social security system. How much does each source provide?
Personal accounts. Generally, compared with men of similar educational backgrounds, personal accounts are projected to provide monthly benefits 30 to 40 percent of men's for "average" women who work in the formal labor market for about half their adult lives and retire five years earlier than men. In contrast, women who work full careers and retire at the same age as men receive pensions from personal accounts that are 60 to 70 percent those of comparably educated men, because of lower wages and contributions.
Public benefits. Low-wage workers, many of whom are women, gain from public benefits designed to ensure a minimum retirement income in the new systems. These public benefits are more targeted toward low earners than were the old systems in Latin America or the current system in the United States. In Mexico a uniform public contribution is added to the accounts of all workers for each day they work; in Chile workers are given a public benefit if the pension from their invested accounts falls below a guaranteed minimum; and, in Argentina, workers receive a flat benefit in addition to the income from their accounts.
Joint pensions. In all three countries, husbands are required to purchase, with the money in their personal accounts, a joint annuity (or other pension) to provide for their surviving wives. Most important, women are allowed to keep their own pension in addition to this joint annuity. This means that working women are no longer penalized, as they are in the United States and other countries where they must give up their own benefit (to which they have contributed many years) in order to receive the widow's benefit. The combination of the two benefits, both of which are financed by personal accounts, allows widows to maintain their previous standard of living without imposing a burden on taxpayers. Joint pensions raise the lifetime benefits of married women with full work careers to levels equal to or higher than the benefits of men. For example, comparing women and men with an incomplete high school education:
- In Chile, the lifetime benefits of married women with full work careers rose from 71 to 97 percent of men's benefits.
- In Argentina, their benefits rose from 65 percent to 108 percent of men's.
- In Mexico, women's benefits rose from 80 percent to 98 percent of men's.
The most important features of the new systems for women are: personal accounts whose benefits they own throughout their lives, joint pensions from their husbands that they are entitled to receive in addition to their own pensions, and public benefits that are targeted toward low earners, who are disproportionately female. The requirement of annuitization or other gradual withdrawal of money in the accounts and indexation of benefits are also particularly important to women because of their greater longevity. The public benefit is price-indexed in Mexico and has been rising faster than prices and on par with wages in Chile, where private annuities are also price-indexed. We can draw on the experience of these three countries to design an individual account system in the United States that improves women's relative positions and increases work incentives while also solving the problem of Social Security's long-term financial shortfall.