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
- This paper is adapted from Estelle James, Alejandra Cox Edwards and Rebeca Wong, "The Gender Impact of Pension Reform," Journal of Pension Economics and Finance, July 2003. It is part of a joint project carried out by James, Cox-Edwards and Wong, financed by the Economics and Gender Trust of the World Bank. For earlier papers coming out of this project, see Alejandra Cox Edwards, "Gender-Differentiated Effects of Social Security Reform: the Case of Chile," The World Bank Economic Review, Vol. 16, No. 3, 2002; Alejandra Cox Edwards, "Social Security Reform and Women's Pensions," Policy Research Report on Gender and Development, Working Paper Series No. 17, 2001, World Bank; Alejandra Cox Edwards, "Gender Inequities in the Pension and Social Protection Systems in the Region," presented in Santiago, Chile, in conjunction with the Annual Meeting of the Board of Governors of the Inter-American Development Bank and the Inter-American Investment Corp., 2001; Susan Parker and Rebeca Wong, "Welfare of Male and Female Elderly in Mexico: A Comparison," in The Economics of Gender in Mexico: Work, Family, State, and Market (Washington, D.C.: World Bank, 2001); Rebeca Wong and Susan Parker, "Social Security Reform in Mexico: A Gender Perspective," paper presented at the Population Association of America Meetings, Washington, D.C.; and at the Interamerican Conference on Social Security, Brazil, 2001. For an expanded version see Estelle James, Alejandra Cox Edwards and Rebeca Wong, "The Gender Impact of Pension Reform: A Cross-Country Analysis," World Bank, Policy Research Working Paper 3074, 2003. We thank the Economics and Gender Trust Fund at the World Bank for support on this project.
- Other papers have discussed the projected income replacement rate for men and women in Chile and Argentina, but none have used actual labor market behavior to simulate employment histories and compare expected benefits under the new and old systems. See Fabio Bertranou, "Pension Reform and Gender in Latin America: Discussion of Relevant Issues," Working Paper, 1998, World Bank; Fabio Bertranou, "Pension Reform and Gender Gaps in Latin America: What Are the Policy Options?" World Development, Vol. 29, No. 5, 2001; and A. Arenas de Mesa and V. Montecinos, "The Privatization of Social Security and Women's Welfare: Gender Effects of the Chilean Reform," Latin American Research Review, Vol. 7, No. 37, 1999.
- The poverty rate of women over age 65 is 15 percent, compared with 7 percent for men over age 65. The poverty rate for women over age 85 is 20 percent. For divorced, separated or never-married elderly women the poverty rate is 27 percent. See Ekaterina Shirley and Peter Spiegler, "The Benefits of Social Security Privatization for Women," SSP No. 12, Cato Institute, Washington, D.C., 1998. See also Debra Street and Janet Wilmoth, "Social Insecurity? Women and Pensions in the United States," in Jay Ginn, Debra Street and Sara Arber, eds., Women, Work and Pensions (Buckingham: Open University Press, 2001).
- Ginn, Street and Arber, eds., Women, Work and Pensions.
- U.S. General Accounting Office, Social Security Reform: Implications for Women's Retirement Income. GAO/HEHS-98-42, 1997, Washington, D.C.
- For tables on work and wage histories of men and women by education, see Estelle James, Alejandra Cox Edwards and Rebeca Wong, "The Gender Impact of Pension Reform: A Cross-Country Analysis," World Bank, 2003.
- Ginn, Street and Arber, eds., Women, Work and Pensions.
- U.S. GAO, Social Security Reform: Implications for Women's Retirement Income.
- Richard Posner, Aging and Old Age (Chicago: University of Chicago Press, 1995), pages 139, 277.
- All data on administrative and insurance costs are from Estelle James et al., "Mutual Funds and Institutional Investments: What Is the Most Efficient Way to Set Up Individual Accounts in a Social Security System?" in John Shoven, ed., Administrative Costs and Social Security Privatization (Chicago: University of Chicago Press, 2000); and Estelle James, James Smalhout and Dimitri Vittas, "Administrative Costs and the Organization of Individual Account Systems: A Comparative Perspective," in R. Holzmann and J. Stiglitz, eds., New Ideas About Old Age Security (Washington, D.C.: World Bank, 2001). Also see Private Pensions Series No. 2: Administrative Costs and Reforms (Paris: Organization for Economic Cooperation and Development, 2001).
- Chile also offers a noncontributory social assistance program called PASIS, which pays about 50 percent of the MPG, funded out of general revenues. This is designed to keep out of poverty the elderly who are not eligible for contributory benefits. The vast majority of its recipients are women living in rural areas. The number of eligible applicants exceeds the available money, so a long waiting list has developed.
- In Argentina the new system is being reexamined as a result of the nation's fiscal crisis, and some modifications will probably be made in the near future. The old system, too, changed frequently, and was not always implemented as written, and several regimes existed. We base our analysis and discussion on the new system as currently written and the old system as written, for the main regime, shortly before the reform. This version of the law did not permit women to keep their own benefit while getting the widow's benefit.
- Here the worker has a choice between a public defined benefit pillar (called PAP) that is a downsized version of the old public system, and a private pillar that is similar to the Chilean model. PAP is available only to workers with more than 30 years of contributions; workers who contribute for less than 30 years lose all their contributions - so the PAP is particularly inappropriate for women. As of 2001, over 80 percent of all contributors, including most women, were in the private rather than the public second pillar. Consequently, in this paper we focus on the private option.
- If 30 percent of all workers get the MPG and the top-up from the public pillar is 33 percent of the lifetime guaranteed level for these workers, the MPG costs only 10 percent as much as a flat benefit, where both are set at the same percentage of the average wage and have the same contributory requirements. For example, if a flat benefit that is 25 percent of the average wage costs 12.5 percent of payroll, a minimum pension guarantee that is 25 percent of the average wage will cost only 1.25 percent.
- INFONAVIT historically provided a negative real return, but the hope of the reformers was that this would change in the future. In our simulations we assume a 0 real return.
- In the United States, a spouse over the age of 65 receives a benefit that is 50 percent of her husband's benefit, even if she hasn't worked and contributed, and after he dies she gets 100 percent of his benefit. This means that married couples receive larger benefits than (and are subsidized by) singles with the same total earnings, and couples with the same total earnings with one wage-earner get larger benefits than (and are subsidized by) couples in which both husband and wife work. Furthermore, the nonworking wife in a single-earner family gets a larger benefit than the wife in a dual earner family with the same total family income. For examples, see Ekaterina Shirley and Peter Spiegler, "The Benefits of Social Security Privatization for Women."
- In the current U.S. Social Security system, divorced women are protected only if married for at least 10 years. If individual accounts in a reformed system were treated as community property, assets that accumulated during the marriage would be split between the two parties, regardless of how long the marriage lasted.
- Julia Lynn Coronado, Don Fullerton and Thomas Glass, "Distributional Impacts of Proposed Changes to the Social Security System," in J. Poterba, ed., Tax Policy and the Economy, Vol. 13, 1999, pages 149-86; Julia Lynn Coronado, Don Fullerton and Thomas Glass, "The Progressivity of Social Security," NBER Working Paper W7520, 2000, National Bureau of Economic Research; Alan Gustman and Thomas L. Steinmeier, "How Effective Is Redistribution under the Social Security Benefit Formula?" NBER Working Paper W7597, 2000, National Bureau of Economic Research.
- The Chile estimates are based on CASEN 94, a nationally representative household survey. The estimates used are based on the urban sample - approximately 100,000 individuals age 16 or older. The Argentine data are based on the micro data set of the Encuesta Nacional de Gastos de los Hogares (ENGH) for 1996-1997, a nationally representative household survey from urban areas. The sample contains 103,858 individuals, of whom 69,895 were 16 years or older. The Mexican data come from the 1997 Mexican National Employment Survey (ENE-97) completed by INEGI (Instituto Nacional de Estadística, Geografía e Informática), the Mexican Statistical Bureau. The sample contains information on 119,405 individuals aged 12 or older. We use the sub-sample corresponding to more-urban areas (communities of 100,000 people or more), which is about 78 percent of the sample. For more details on data sets, potential data problems and construction of tables, see James, Edwards and Wong, "The Gender Impact of Pension Reform." James, Edwards and Wong, "The Gender Impact of Pension Reform: A Cross-Country Analysis."
- See Estelle James and Xue Song, "Annuities Markets around the World: Money's Worth and Risk Intermediation," CeRP Working Paper 16/01, 2001, Center for Research on Pensions and Welfare Policies.; Estelle James, Dimitri Vittas and Xue Song, "Annuities Markets in Comparative Perspective: Do Consumers Get Their Money's Worth?" paper presented to the American Economic Association, 2001.
- For details on the slow growth case, see James, Edwards and Wong, "The Gender Impact of Pension Reform: A Cross-Country Analysis."
- For a summary of the U.S. literature on this topic, see U.S. General Accounting Office 1997; Kathy Burnes and James Schulz, "Older Women and Private Pensions in the United States," 2000, National Center on Women and Aging, Brandeis University; Shirley and Spiegler, "The Benefits of Social Security Privatization for Women."
- Estelle James, Dimitri Vittas and Xue Song, "Annuities Markets in Comparative Perspective: Do Consumers Get Their Money's Worth?"; James and Song, "Annuities Markets Around the World: Money's Worth and Risk Intermediation,"; Estelle James, Guillermo Martinez and Augusto Iglesias,"Payout Choices by Retirees in Chile: What are They and Why?" working paper draft, 2003.
- In reality most adjustments to insolvency have not been distributionally neutral. For example, inflation with indexation applied only to a minimum pension hurts high earners and men disproportionately, while raising the payroll tax rate subject to a fixed maximum hurts low earners, and equalizing retirement ages for the two genders hurts women, especially in a defined benefit plan. We have no way of knowing which adjustments would have been chosen in these three countries if they had not shifted to a multipillar structure.
- In Chile, a = 5 percent for each of the first 10 years and 1 percent per year thereafter up to a maximum replacement rate of 70 percent, so the old system paid 50 percent of pensionable salary for the first 10 years of work. The pensionable salary was the average of the last five years of work, of which the last three years were indexed for inflation. Pensions began at age 60 for women, 65 for men. In Argentina, the old system paid: a) 70 percent of base salary for 20 years of contributions plus an additional 1 percent for every year over 30, or b) 50 percent of base for those who worked only 10 years, plus an additional 1 percent for every year over 10. In both cases, base salary was defined as the best three out of 10 years. Workers qualifying for (a) could retire early at age 60 for men, 55 for women, but (b) started at age 65. In Mexico, the old system paid a proportion of the base salary for the first 10 years plus an increment for every year over 10, where the base salary was the average of earnings during the last 250 working weeks. The proportion of base varied negatively with wages, ranging from 13 percent for high earners to 80 percent for low earners. The accrual rate for additional years varied positively with wages, ranging from .56 percent to 2.45 percent per year. Moreover, the monthly pension was paid for 13 months instead of 12. (See James, Edwards and Wong, "The Gender Impact of Pension Reform." Retirement age was 65.
- Julia Lynn Coronado et al., "Distributional Impacts of Changes Proposed to the Social Security System," and "The Progressivity of the Social Security System," and Alan Gustman and Thomas L. Steinmeier, "How Effective Is Redistribution under the Social Security Benefit Formula?"
- Workers who do not have enough in their accounts to purchase an annuity that equals the MPG level or higher must use up their personal accounts by withdrawing an amount equal to the MPG monthly. When they run out of money the state provides the MPG. For purposes of our discussion, we convert the expected value of the lifetime state payment into an actuarially equivalent monthly top-up.
- For further details see James, Edwards and Wong, "The Gender Impact of Pension Reform: A Cross-Country Analysis."
- Douglas Bernheim, "Mismatch between Life Insurance Holdings and Financial Vulnerabilities - Evidence from the Health and Retirement Survey."