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
Women’s Gains from the New Systems
"The old social security were insolvent and Argentina was already defaulting on payments to retirees."
Comparison of the new and old social security systems in Latin America is difficult because the old systems were insolvent and unable to provide the promised benefits. In the long run, the countries we are considering faced the prospect of raising taxes (which were difficult to collect) and/or reneging on their pension promises. Chile was facing financial insolvency even in the short run and Argentina was already defaulting on payments to retirees. Because of the uncertainty regarding these benefit payments, instead of comparing the dollar value of benefits we compare the relative position of men and women under the new and old systems and the new system benefits of women with differing education levels, labor market experience and marital status.
We estimate the monthly benefits that representative women and men would receive from annuities based on their personal retirement accounts. However, our focus is on lifetime benefits because the retirement age changed as part of these reforms, it differs across countries and subgroups within each country, and the widow's benefit starts at a much later age than benefits based on own earnings. This analysis allows us to determine the extent to which reforms have improved the ratio of women's benefits to men's and which subgroups of women have gained the most, even if we can not specify absolute amounts. All monetary values have been converted to 2002 U.S. dollars. (The assumptions about future wage growth and interest rates made in our simulations of lifetime benefits are discussed in Appendix I.)
Income from Women's Own Annuities. Under the new systems, because of their lower lifetime earnings, women with average work experience receive smaller monthly annuities from their own retirement accounts than do married men with similar educations. However, the benefit gap between full career women and men is narrower. To simplify, we assume that all workers retire at the legal retirement age, which is 60 for women in Chile and Argentina, 65 for women in Mexico and 65 for men in all three countries. Results based on other retirement ages may be found in Appendix II. We show these results for three educational categories, roughly corresponding to primary, secondary and higher education. (Educational levels in these three countries are lower than in the United States and many current workers have not completed primary school, although this is less likely to be the case in the future.)
Chile. As Figure I shows, in Chile, on average:
- A woman who did not complete primary school can purchase a monthly annuity of $66 with the funds in her account; if she has completed secondary school she can get a $160 annuity; and with a university degree plus some postgraduate work she can get $487.
- In contrast, a typical male worker at these three levels of education can purchase a monthly annuity that pays $203, $440 and $1,410, respectively.
- Thus, these women receive approximately one-third as much as men with similar education.
Argentina. As Figure II shows, in Argentina, on average:
- A woman with an incomplete primary education can afford a $36 monthly annuity, one who has completed secondary school can get $104, and a woman with a university degree can get $283.
- Men with comparable education can purchase annuities of $175, $389 and $799, respectively.
- Thus, women get only 20 percent to 35 percent as much as men, because they have worked much less, and at much lower wages.
Mexico. Figure III shows a similar situation in Mexico:
- Women who have not completed primary school are projected to receive monthly annuities of $86, with some secondary education this becomes $137 and with some university education $453.
- By comparison, men at these educational levels get $289, $413 and $891, respectively.
In Mexico, women are projected to get 30 percent to 50 percent as much as men with similar education.
Impact of more work and contributions. In Chile and Argentina, the normal retirement age for women is five years lower than that for men. If women in these countries worked to age 65, they would collect interest for five more years and their annuities would cover five fewer years. As a result, their monthly pensions would increase by 50 percent. In reality, women are unlikely to work to age 65, but men often retire early, by age 60. Data from Chile indicates that this is quite common, causing the gender gap in monthly annuities to shrink.
"Public benefits supplement the annuities from personal accpounts, especially for low-income workers."
Some women work more than average - in fact, they may work as much as men. The monthly annuities of these "full career" women are much higher. In general, they are 60 percent to 70 percent as large as the annuities of men. The remaining difference is due mainly to the lower wages that women receive and the smaller contributions they therefore make.
Income from Public Benefit. As previously discussed, the new systems also provide a public benefit that goes disproportionately to low earners. This raises the total pension of women by a higher percentage than that of men because of their lower wages and smaller retirement accounts. These public benefits raise the female/male ratio of total retirement income and produce a higher rate of return on contributions for women than for men. But the precise effect on women depends on the design of the benefit.
Chile. The reformed system has a Minimum Pension Guarantee (MPG):
- The MPG provides the equivalent of a $12 monthly top-up to the annuity of the average woman who has not completed primary school, raising her total pension by 18 percent.
- Women in higher educational categories do not receive this benefit because their own annuity is above the MPG floor, and for the same reason very few men or women with full lifetime work and contribution histories receive this public benefit.
- Twenty years of work are required to be eligible for the MPG. Thus, low-earning women are encouraged to work 20 years, but they are discouraged from working more than 20 years because if their own annuity increases their public benefit will decrease.
"Public benefits - Chile's MPG, Argentina's flat (and reduced falt) and Mexico's SQ - also raise women's retirement income porportionately more than men's."
Argentina. In contrast to Chile, most Argentine men are eligible for the flat public benefit of $77 a month, and receive it regardless of income. Most women do not work enough years to qualify for the full flat benefit, but many receive a reduced flat benefit that begins at age 70. As shown in Appendix Table II:
- The monthly annuity of women with primary or secondary education is supplemented by a $53 reduced flat benefit, which increases their total pension by 147 percent at the primary level and 52 percent at the secondary level.
- In comparison, the full flat benefit increases monthly pension for men by 44 percent at the primary level and 20 percent at the secondary level - a much smaller percentage because of the larger own-annuities that men receive.
- Women with a college degree work long enough to get the full flat benefit of $77, which adds 27 percent to their pension, but this same benefit adds only 10 percent to the pension of men with a college degree.
- Since the flat benefit is financed, in part, by a tax on wages, the fact that men earn more than women and get a smaller benefit relative to their wages and annuities means that women are getting a higher total return on their contributions.
Ten years of work are necessary to become eligible for the reduced flat benefit. Since women who work only 10 years contribute little but get a relatively large public benefit, they receive the largest subsidies. This may discourage market work among women. (The Argentine government is considering eliminating the reduced flat benefit or linking it more closely to years of service, which will significantly affect women's incentive to work.)
Mexico. Finally, Mexico's Social Quota (SQ) adds a flat amount to every worker's account for each day worked. This, too, means that the percentage increment to pensions falls as incomes rise:
- The SQ adds 62 percent to the monthly pension of women with incomplete primary education, compared with a 36 percent increment for men.
- It adds 44 percent for women with partial secondary schooling, compared with 25 percent for men.
- Women with some university education get a 30 percent increment from the SQ, while men get an 11 percent increment.
- Because Mexico's SQ gives an extra benefit for every day of work, it encourages work by women more than do the public benefits in Chile or Argentina.
Mexico also offers an MPG, but 25 years of work are required for eligibility. Since most low-earning women work less than 25 years, and most men have own-annuities that exceed the MPG floor, it is projected to have little impact if it remains price-indexed.
"Husbands are required to purchase a joint annuity for their wives, which widows receive in addition to their own annuity."
Income from Joint Annuities. The gender gap in retirement income from women's own annuities and public benefits is offset further by joint annuities (or widows' benefits) that husbands are required to provide for their surviving wives. Joint annuities benefit only married women. These intrahousehold transfers are an important part of the new systems. In Chile and Mexico the widow gets 60 percent, and in Argentina 70 percent, of the husband's benefit. This adds 30 percent to 70 percent to her own annuity on a lifetime basis. It compensates for the lower wages and greater longevity of women.
The joint annuity is especially important because a widow's cost of living is estimated to be roughly 70 percent that of a couple's cost, due to household economies of scale. The widow's benefit plus her own benefit maintains her purchasing power at 70 percent to 80 percent of the previous level, so her standard of living is unchanged when her husband dies. The joint annuity also protects women who did not work at all in the formal market.
Most important, since her husband rather than the public treasury has paid for the joint annuity, the widow is allowed to keep her own annuity in addition to the survivors' benefit. This contrasts with earlier systems in Chile and Argentina, where women had to give up their own benefits to get the widow's benefit. Since women got no additional benefit for their own contributions, their work and participation in the social security system was penalized and discouraged under the old systems. The new systems encourage work.
Total Lifetime Pension from Own-Annuity, Public Benefit and Joint Annuity. Our discussion now shifts to total lifetime benefits, rather than monthly pension incomes, because the widow's benefit, and in Argentina the reduced flat benefit, start at a much later age than do benefits based on own earnings. Expected lifetime benefits are measured in terms of their present value when each person reaches age 65. Figures IV to VI show women's projected lifetime benefits in 2002 U.S. dollars, and the amounts from own annuities, joint annuities and public benefits for women who did not complete high school - which is very common in Latin America. We distinguish by work experience and marital status. The sum of all three benefits brings the lifetime pension of full career women very close to and sometimes above that of men. Data on women with other levels of education can be found in the Appendix Tables.
Chile. Figure IV shows the accumulated lifetime benefits from the own-annuity and joint annuity for women with an incomplete secondary education under the new system:
- A woman who works only 10 years could fund an annuity at retirement that yields lifetime benefits of $10,200, but for the average woman who works 24 years this increases to $20,300.
- By contrast, the average married man accumulates enough to fund an individual annuity that yields lifetime benefits of $46,300, but this is reduced by $6,000 that is used to finance the required joint annuity, bringing the net total to $40,300.
- The survivor's benefit from the joint annuity increases the lifetime benefits of married women by $7,700.
- Thus, a married full career woman receives $31,500 from her own annuity plus $7,700 from the joint annuity, for a total of about $39,200, which is practically the same as that of a comparable man.
Argentina. As Figure V shows, in Argentina all eligible workers receive a flat or reduced flat benefit, and surviving spouses receive a portion of the husband's flat benefit, in addition to the joint annuity. As a result:
- A woman who works only 10 years can purchase an annuity at retirement that yields lifetime benefits of $8,300, but the average woman who works 20 years can get $11,500.
- These women also get a reduced flat benefit that totals $5,500.
- By contrast, the average married man could fund an individual annuity that yields lifetime benefits of $41,700, but this average is reduced $7,900 by the joint annuity requirement and augmented $10,000 by the full flat benefit, bringing the total to $43,800.
- The survivor's benefit from the joint annuity increases the lifetime benefits of married women by $8,300, and they are also entitled to a portion of their husband's flat benefit - another $2,500.
- Full career married women, who work for most of their adult lives, accumulate an annuity from their own account of about $24,800, plus the full flat benefit that has a lifetime value to them of $11,900, plus the proceeds from the joint annuity and the widow's portion of the husband's flat benefit, which together total $10,800. Thus, their lifetime benefits are $47,500 - 108 percent of the lifetime benefits of the typical married man.
Mexico. As Figure VI shows, for men and women with a ninth-grade education:
- A woman who works only 10 years can purchase an annuity that yields lifetime benefits of $10,700, but this increases to $21,300 for an average woman who works 22 years.
- This is augmented by $9,200 from the social quota for the average woman.
- In contrast, the average man accumulates $65,100 in his own account and $16,600 from the social quota, but he must use $9,900 of this to finance the joint annuity, bringing his total to $71,800.
- Married women, on average, get a joint annuity worth $11,000.
- Thus, the full career married woman accumulates $42,500 in her own account plus $16,600 from the social quota plus $11,300 from the joint annuity, bringing her total to $70,400 - approximately the same as that of the average man.
Women's Benefits Relative to Those of Men, Before and After Reform. As previously mentioned, uncertainty regarding future benefit levels under the old insolvent systems prevent us from comparing the absolute dollar values of the benefits women would have received under the old systems to their benefits under the new system. However, we can compare the projected female/male ratios of benefits before and after reform, since these are less likely to be changed by attempts to achieve fiscal solvency. In all three countries, the new systems provide total lifetime retirement benefits for the average married woman of 60 percent to 90 percent those for men, and lifetime benefits for full career married women usually equal to or exceeding those of men. For married women, gender ratios are generally higher in the new systems than they were in the old systems. This is especially true for workers in the bottom educational categories. Below we compare gender ratios of lifetime benefits for workers with incomplete secondary education. Other comparisons are presented in Appendix II.
Chile. As Figure VII shows, in Chile:
- The average married woman's lifetime benefits rose from 62 percent to 68 percent that of the average married man with a similar education.
- Benefits of full career married women rose from 71 percent to 97 percent of men's benefits.
- Single women who worked a full career, however, saw a small decline in their benefits relative to men's, from 71 percent to 68 percent.
Argentina. As Figure VIII shows, in Argentina:
- The average married woman's benefits rose from 27 percent to 63 percent of those of the average married man with a similar education.
- Benefits of full career married women rose from 65 percent to 108 percent of men's benefits.
- Full career single women also gained relative to men's benefits, but by a smaller amount - from 60 percent to 71 percent.
Mexico. As Figure IX shows, for men and women with a ninth grade education:
- The average married woman's benefits rose from 50 percent to 58 percent of those of the average married man with a similar education.
- Benefits of full career married women rose from 80 percent to 98 percent of men's benefits.
- Full career single women also saw an increase as a percentage of men's benefits, from 57 percent to 72 percent.
"Women and low-income workers gained the most from reforms."
Gains Relative to High-Earning Males. We compared the change in benefits for men and women with different levels of education with the change experienced by men in the top educational category. We found that workers in the lower educational categories gained more and that women gained most. As we have seen, the public benefits redistribute income toward retirees with lower incomes, many of whom are women. Women also gain from the joint annuity requirement. As a result, women in all education groups gain, relative to men in the highest education category. As Figure X shows:
- In Chile, the ratio of postreform to prereform lifetime benefits for the average married women with a primary or incomplete secondary education was 40 to 50 percent more than that for married men in the highest educational category.
- In Argentina the ratio was 200 percent higher and in Mexico 60 to 80 percent higher than those for best-educated men.
Men in the bottom educational groups also made relative gains, but not so large as women.
Appendix II discusses in greater detail each source of retirement income and how it affects women versus men. For simulation results for all educational, marital and labor force participation groups, see the Appendix Tables.