The Impact of Social Security Reform on Women in Three Countries

Studies | Social Security | Women In The Economy

No. 264
Tuesday, November 04, 2003
by Estelle James, Alejandra Cox Edwards & Rebeca Wong


Introduction

"In pay-as-you-go social security systems, retirement benefits of current retirees are funded by taxes on current workers."

1Most public pension systems are financed on a pay-as-you-go basis, which means that the retirement benefits of current retirees are funded by taxes on current workers. Due to increasing life expectancies, falling fertility rates and generous benefits, these systems face growing financial shortfalls and require high tax rates that deter economic growth. To address these problems, a number of countries have adopted pension reforms in which social security benefits are primarily funded by individual investment accounts with payroll contributions from workers. Personal accounts are supplemented by a public benefit, more or less targeted toward low-income workers. Some countries also have adopted or are contemplating requirements for joint annuitization or sharing of pension rights and/or personal account balances between spouses.

These reforms have reduced the future unfunded liabilities of public pension systems, financed part of the benefit through investment earnings rather than taxes, and changed the distribution of benefits and costs. They have had different effects on men and women, single workers, and married workers and their spouses. This paper considers the gender impact of reforms adopted over the past 20 years in three Latin American countries: Chile, Argentina and Mexico. The old systems in these countries were traditional defined benefit pay-as-you-go schemes similar to that in the United States. The new systems strongly rely on individual accounts.

"Chile, Argentina, Mexico and other countries have adopted reforms that rely on personal accounts funded by workers and invested in stocks and bonds."

We can use their experiences to draw inferences about which design features are likely to produce desirable gender outcomes in the United States. The gender impact of social security reform is important because the majority of the old and the vast majority of the very old are women. In the United States, 60 percent of people over the age of 65 and 72 percent of those over age 85 are women, and this disparity has been increasing through time. Furthermore, women are more dependent on social security for retirement income than are men, and women are a disproportionate share of retirees living in poverty. Very old women constitute a persistent pocket of poverty in our society.2

In order to analyze the effects of the reforms, we use household survey data to construct the wage and employment histories of representative men and women in Chile, Argentina and Mexico. We use the histories to project what their pensions will be under the new systems and what they would have been under the old systems.3 We examine how the shift to the new systems affected women versus men and the differential effects on various subgroups of women - those with high versus low educational backgrounds, those who have continuous attachment to the labor market versus those who work primarily in the home, and single versus married women. We emphasize the key design features that determine these gender outcomes. We find that Latin American reforms have raised the level of benefits of women relative to those of men and of low-income workers - many of whom are women - relative to high earners. [For a discussion of Methodology, see Appendix I.]


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