Elsa ForneroUniversity of Turin and CeRP

(Centre for Research on Pensions and Welfare Policies)

Women’s Economic SecurityWomen’s Economic SecurityOld Challenges and New Threats after the Financial CrisisOld Challenges and New Threats after the Financial Crisis

International Conference and Expert Meeting onTHE GLOBAL FINANCIAL CRISIS – IMPLICATIONS FOR WOMEN

Haifa, Israel, 8-12 November 2009

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Adequacy of saving for old ageAdequacy of saving for old age(for women in particular)(for women in particular)

Questions:1. What will be the consequences of pension reforms, on the one

hand, and of the financial crisis, on the other, on the adequacy of retirement provisions?

2. How will households’ savings respond to changes in pension provisions?

3. How can household “preparedness” for retirement be improved?

4. What can policy do to improve saving choices?

While these questions are general, understanding how women fare in these respects is of crucial importance

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Unfavorable demographic trendsUnfavorable demographic trendsEvolution of the dependency ratio by countryEvolution of the dependency ratio by country

Source: Visco, I. (2006), “Longevity risk and financial markets”, keynote speech to the 26th SUERF Colloquium, Lisbon

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Gender differences in life expectancy at 60 (Gender differences in life expectancy at 60 (2000-2000-05)05)

Years0 5 10 15 20 25 30

France

Italy

Germany

UK

China

India

Israel

Mali

Life expectancy at age 60 is the additional number of years expected to be lived by a woman or man who has survived to age 60. Source: United Nations

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Employment rates, 2004Employment rates, 2004

Source: ILO (KILM 2009)

0 10 20 30 40 50 60 70

Sweden

United Kingdom

Israel

Germany

France

Poland

Spain

Italy

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Earnings ratioEarnings ratio

%30 40 50 60 70 80

Tunisia

Italy

Poland

Israel

China

Norway

Source: UNDP, Human Development Report 2009

Ratio of female to male earned income, 1996-2007

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AAssessing adequacy of retirement provisionsssessing adequacy of retirement provisions

i. Individual dimension: • sensible allocation of resources in the life cycle, given market and institutional

context• the life cycle model is the natural benchmark

ii. Pension system dimension:

A well structured institutional design, financially sustainable, for an efficient risk management, contemplating:

• risk diversification and sharing both within and across generations, as well as across genders

• a mixed system, combining different financing methods (public PAYGO and private funding, through financial markets)

• enhancement of individual responsibility, through information and education• appropriate design of workers’ choice situations, e.g. default options• a few guarantees, sheltering individuals against uninsurable risks

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A life cycle perspectiveA life cycle perspectiveGeneral objectivesof retirement systems

1.Consumption smoothing

2.Prevention of poverty in old age

3.Maintaining a compact between generations and genders

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W

P

C

Y

Age

€

Ret

Real life Real life is far more complicated is far more complicated - Illiquidity (house)- Imperfect annuity mkt- Investment risk- Longevity risk

- Bad health outcomes- Economies of scale in hh- Home production- Work-related expenses

- Imperf indexation- Progressivity

Household composition - Children in & out - Divorce

Early ret (health or job shock)

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Do women face higher retirement risks? Do women face higher retirement risks?

General objectivesof pension systems

Women’s specificities

Consumption smoothing

Prevention of poverty in old age

Maintaining a compact between generations

•Higher longevity •No evidence of a significant gender difference as for myopia/time inconsistency

•Higher earning risks, because of lower, more fragmented and weaker participation in the labor market •Less investment in women’s human capital education and health

Economic and demographic risks fall more heavily on women?

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New perspectives in pension systems designNew perspectives in pension systems design

In the last 10-15 years, the emphasis has shifted

• from redistribution to insurance

• from the state to market and individual responsibility• from entitlements to incentives

as a way both to strengthen the financial sustainability of the system and to reduce distortions in households’ savings and labour decisions.

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Impact of pension reformsImpact of pension reformsAlthough different countries have followed different reform

paths, pension promises in general have been downsized• retirement ages have been raised• replacement rates have been reduced• benefits have been de-indexed from wages to prices• the link between individual benefits and contributions has been strengthened

Over time, reforms will• reduce the relative importance of the first pillar• replace DB with DC schemes, based on financial accumulation and (possibly) on

actuarial principles• strengthen the role of occupational and personal plans, where workers have

greater choice, responsibility and risk

► Pension reforms will affect saving adequacy, particularly in the future, when the decrease in public pension benefits will become apparent

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From family to individualFrom family to individual

The strengthening of the principle of actuarial equivalence induced by the introduction of (notional or actual) funded pillars moves the focus of policies from the family to the individual

The focus on the family had the advantage of providing an insurance to its members with limited resources, but at the price of a lower independence of women

….and greater risks because of their reduced access to “regular” paid work

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Have reforms been friendly to women?Have reforms been friendly to women?

The emphasis on the individual introduces important labor market incentives and stresses women’s role as persons rather than as wives/widows, i.e. through pension crediting for care periods

However, most women are far from being able to build careers supporting an adequate pension level, given the family and social tasks they are still largely expected to perform

They are also more exposed to financial risks

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Women’s pension entitlements Women’s pension entitlements

Elderly single women are at greater risk of poverty than aged couples and the share of elderly women living alone is expected to increase substantially due to population ageing and women’s longer life expectancy

The so-called “derived-rights” – survivors’ benefits, spouse benefits, etc. – have traditionally been a very important source of income for women in old-age – especially for elderly women living alone

This can be problematic: • The move toward increasing actuarial fairness may disproportionately damage women, due to their weaker attachment to labour market• Derived rights (but also lower retirement ages for women) are an ex-post remedy that does not solve the real problem: lower participation rates, discontinuous careers, lower wages

Source: Monticone, Ruzik, Skyba (2008), Women’s pension rights and survivors’ benefits. A comparative analysis of EU Member States and candidate countries, ENEPRI RESEARCH REPORT NO. 53

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Impact of the financial crisisImpact of the financial crisis The recent financial crisis has called into question the very grounds of

pension reforms in most crises, in particular the «risk diversification» rationale for creating a privately funded pillar, based on financial returns, alongside the public one, established on an intra-generational pact

The problem is whether conditions exist for financial markets to become a significant, profitable and sustainable complement to the public system

Trust and reliability features in supplementary pensions should be strengthened, and individuals (workers/families) should be enabled, also through programs of financial education, to take adequate and informed decisions on the accumulation of retirement saving

While improvements are also desirable in asset management techniques, benefit guarantees, their structure, cost and burden can no longer be neglected

While the crisis is a cause of serious distress, it can also be a source of new opportunities, not to be missed. This would indeed happen if a pure and simple return to the past social security model should prevail.

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Preferences, discrimination, or simply ignorance? Preferences, discrimination, or simply ignorance?

A poor working history may not be the only reason behind women’s lower pension income

Other candidate explanations are the following: • Are women more risk averse? This is debated, but if it were true it

would have implications for retirement wealth

• they also appear less confident, and certainly not overconfident

• are they more discriminated in the credit market? Alesina et al. (2008) show that in Italy self-employed women and micro-firms owned by women pay higher interest rate than men on overdraft facilities, controlling for their riskiness

• Women appear to have lower financial literacy (Lusardi and Mitchell 2006). Even though the reason is clearly rooted in culture/tradition rather than in cognitive abilities, it has key implications for retirement wellbeing

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Financial literacyFinancial literacyIt has become clear that individuals have a hard time planning

ahead and making long term financial decisions Financial illiteracy is probably an important reason. Those

who are not literate are less likely to plan and to accumulate wealth, and more likely to borrow, using high cost instruments

Women (and other demographic groups) appear to have a lower understanding of basic notions concerning risk and savings management. Risk illiteracy is particularly relevant

Lack of knowledge could be inconsequential if knowledge had little effect on behaviour or if households relied on experts’ advice. Most individuals - particularly those with low financial literacy - rely on family and friends.

Women too are more likely to rely on informal advice

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Policy Options: opportunities Policy Options: opportunities vsvs compensation compensation

Aiming at reducing women’s disadvantages in the family and in the market place

• Invest in human capital (health and education)• Help for child care

• Remove barriers in the labor market and improve job opportunities

• Reduce the dependency of benefits from either the husband (family dependence) or the state (political dependence)

• Encourage sharing in family duties (i.e. “parental leave”) • Recognize “care activities”• Reduce discrimination in the labor market • Target policies to protect widows, and survivors in general

• Encourage retirement savings (tax incentives, financial education, transparency and effective supervision of financial markets)

• Use uniform life tables to calculate public annuities (?)

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Concluding remarksConcluding remarks •Both pension reforms and the financial crisis are putting more risks

on women's economic security in old age •There is a crucial trade-off between a view that advocates actuarial

fairness without any kind of redistribution and another one that incorporates principles of social justice into the system, thus attributing to pension systems a major role in poverty reduction and resources reallocation

•Corrections are to be found in a better regulations of financial markets, in financial education and in the provision of some guarantees in the public system

•However, if inequality is not reduced in employment and in household tasks, then the permanence of compensatory measures in pension systems become justifiable, in spite of the distortions they induce by loosening the link between contributions and benefits.

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