Elsa Fornero
University of Turin and CeRP
(Centre for Research on Pensions and Welfare Policies)
Women’s Economic Security
Old Challenges and New Threats after the Financial Crisis
International Conference and Expert Meeting on
THE GLOBAL FINANCIAL CRISIS – IMPLICATIONS FOR WOMEN
Haifa, Israel, 8-12 November 2009
Adequacy of saving for old age
(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 trends
Evolution 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 (200005)
Mali
Israel
India
China
UK
Germany
Italy
France
0
5
10
15
20
25
30
Years
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, 2004
Italy
Spain
Poland
France
Germany
Israel
United Kingdom
Sweden
0
10
20
30
40
50
60
70
Source: ILO (KILM 2009)
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Earnings ratio
Ratio of female to male earned income, 1996-2007
Norway
China
Israel
Poland
Italy
Tunisia
30
40
50
60
70
80 %
Source: UNDP, Human Development Report 2009
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Assessing adequacy of retirement provisions
i.
Individual dimension:
•
•
ii.
sensible allocation of resources in the life cycle, given market and institutional
context
the life cycle model is the natural benchmark
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 perspective
General objectives
of retirement systems
1.Consumption
smoothing
2.Prevention
of poverty in
old age
3.Maintaining a
compact
between
generations
and genders
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Real life is far more complicated
- Illiquidity (house)
- Imperfect annuity mkt
- Investment risk
- Longevity risk
€
W
- Bad health outcomes
- Economies of scale in hh
- Home production
- Work-related expenses
Y
C
Household composition
- Children in & out
- Divorce
P
- Imperf indexation
- Progressivity
Early ret
(health or
job shock)
Ret
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Age
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Do women face higher retirement risks?
General objectives
of pension systems
Women’s specificities
Consumption smoothing
•Higher longevity
•No evidence of a significant gender
difference as for myopia/time inconsistency
Prevention of poverty in old
age
Maintaining a compact
between generations
Elsa Fornero - November 2009
•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?
10
New perspectives in pension systems design
In the last 10-15 years, the emphasis has shifted
• from redistribution
• from the state
• from entitlements

to insurance

to market and individual
responsibility

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 reforms
Although 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 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?
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
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 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?
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 literacy
It 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 vs 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 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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