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
Key Design Features of the Old and New Systems
With variations described below, the system adopted in Chile was emulated in Mexico and Argentina, as well as in other Latin American and European countries making the transition from socialism to market economies.
"In Chile, workers invest 10 percent of their wages and receive a public benefit if their annuities are less than the Minimum Pension Guarantee."
Chile. In 1981, Chile replaced a mature traditional pay-as-you-go defined benefit system with an individual account buttressed by a government-financed minimum pension guarantee (MPG). Mandatory payroll contributions are paid to competing private investment managers, rather than to a public fund. Workers contribute 10 percent of payroll for investment plus about 3 percent for administrative fees and premiums for disability and survivors' insurance.10 Upon retirement (age 65 for men, 60 for women), workers can make gradual withdrawals from their accumulated savings spread over both spouses' lifetimes, or buy an annuity that must be joint for married men.
Those who have worked at least 20 years have a minimum pension guaranteed (MPG). If the worker's private retirement savings do not reach the MPG level, the government uses general revenues to top it up. The MPG is not formally indexed to prices but so far has risen faster than prices, roughly at the same pace as average wages, due to ad hoc increases by the government.11
"In Argentina, workers invest 7.75 percent of payroll, and full-career workers - mostly men - receive a reduced flat public benefit."
Argentina.12 In Argentina, workers contribute 11 percent of payroll, which includes 3.25 percent to cover administrative fees and survivors' and disability insurance fees and 7.75 percent for investment in an individual account.13 Upon retirement (age 65 for men, 60 for women), the accumulated assets are taken out in the form of gradual withdrawals, annuities (joint annuities with 70 percent to the survivor for married men) or a lump sum for account balances above the minimum annuity amount.
Instead of a minimum pension guarantee, Argentina provides a basic "flat" benefit in addition to the personal account. It was originally financed by a payroll tax, but general tax revenues have now been partially substituted. The flat benefit is paid to all eligible workers rather than being a top-up for the few, making it roughly 10 times as costly as an MPG set at the same percentage of the average wage.14 To contain costs, eligibility is restricted to workers with at least 30 years of contributions - which excludes most women. Workers, mainly women, who reach age 70 with 10 years of contributions are granted a reduced flat pension that is 70 percent of the full flat benefit.
"In Mexico, workers invest 6.5 percent of payroll in retiremnt accounts and 5 percent in a housing account they can use for retirement."
Mexico. In Mexico, a contribution of 6.5 percent of payroll is made to individual accounts. Disability and survivors insurance while working are financed separately. Workers choose from among competing investment managers. Retirement income is augmented by a 5 percent contribution of each worker's wage to a housing fund, called INFONAVIT. If a worker does not borrow the money in the housing fund to purchase a home, it becomes part of his or her retirement assets.15 Upon retirement at age 65 for both genders, workers choose between an annuity (joint annuities with 60 percent to the survivor) or gradual withdrawals spread over both spouses' lifetimes.
The state helps finance this system in three ways. First, it pays a flat "social quota" (SQ) into each worker's account for each day of work, equal to 5.5 percent of one daily minimum wage. The SQ is financed out of general revenues, and it is designed to increase the accounts of low-income workers and their incentives to join the system. The SQ is price-indexed (as is the minimum wage) but initially was 2.2 percent of the average wage. This percentage will decline as wages rise faster than prices over time. Second, workers who contribute for a total of 25 years are guaranteed a minimum pension, initially equal to the minimum wage (40 percent of the average wage) indexed to inflation. Third, although the new system is mandatory for new workers, those who were already in the labor force when the reforms were made can opt back into the old system upon retirement.