Gender wage and longevity gaps and the design of retirement systems
Barigozzi F., Cremer H., Lozachmeur J.-M., 2023 – Journal of Economic Behavior & Organization
The longevity gap and the wage gap are two crucial factors in gender inequality, particularly when it comes to retirement. On average, women outlive men, but having earned less during their active lives, they tend to have fewer savings when retiring. As a result, women are at greater risk of poverty in later life than men.
The longevity gap has decreased during the last decades but continues to be significant. Among OECD nations, the difference in life expectancy at birth is currently around four to six years. The gap in earnings is synthesized by the gender wage gap: on average, women in the EU earn around 15 % less per hour than men. Later in life, the gender wage gap translates into a (largely amplified) gender pension gap of 37%.
In the EU, pension systems manage to reduce the inequalities induced by the earning gap to some extent. The importance of solidarity and redistribution has been recently confirmed by the Resolution of 14 June 2017 on the need for an EU strategy to end and prevent the gender pension gap. As a result, in many Member States, women are still granted pension rights for childcare (premium for childcare and gender-specific retirement ages) subject to certain conditions.
However, this differential treatment of women has been increasingly challenged by policymakers who advocate gender neutrality. At the EU level, Directive 2006/54/EC (following Directive 96/97/EC), promoting equal treatment in social security schemes and prohibiting (gender) discrimination, reduces the possibility of redistributing from men to women. Specifically, the Directive’s Chapter 2, article 9, states that “Provisions contrary to the principle of equal treatment shall include those based on sex, either directly or indirectly, […] for fixing different retirement ages […] and setting different conditions for the granting of benefits.” Following the Directive, all Member States reduced gender differences in retirement ages and pension benefits. Some countries fully implemented gender equality of pensionable ages (Austria, Belgium, Denmark, and Germany, among others); some other countries apply derogations following Article 141(4) of the Treaty and continue to compensate women for the time they spent raising children (for example Bulgaria, France, Italy, Lithuania, Slovenia).
The EU Directive takes for granted that women should be the redistribution target. However, what is the appropriate “direction” and extent of redistribution between men and women in a society where women live longer but have lower labor incomes? Another open question concerns the implication of “equal treatment” rules requiring gender neutrality in the pension scheme. Though appealing from a “horizontal equity” perspective, imposing gender neutrality in a society where men and women differ in crucial characteristics like life expectancy and earning opportunities necessarily reduces overall welfare. However, how will the different groups (working men and women, single or living in couples) be affected by the gender neutrality rule?
Francesca Barigozzi, Helmuth Cremer, and Jean-Marie Lozachmeur address those questions in their article entitled “Gender wage and longevity gaps and the design of retirement systems”, recently published in the Journal of Economic Behavior and Organization.
In a theoretical model, the authors study the design of pension benefits for male and female workers. Women live longer than men but have a lower wage. Individuals can be single or live in couples who pool their incomes. Social welfare is utilitarian but an increasing concave transformation of individuals’ lifetime utilities introduces the concern for redistribution across individuals with different lifespans.
The authors derive the optimal direction of redistribution and show how it is affected by a gender neutrality rule. With singles only, a simple utilitarian solution implies redistribution from males to females. When the transformation is sufficiently concave, redistribution may or may not be reversed. With couples only, the ranking of gender retirement ages is always reversed when the transformation is sufficiently concave.
Under gender neutrality, pension schemes must be self-selecting. Gender neutrality implies distortions of retirement decisions, limits redistribution, and negatively affects the group towards which redistribution is targeted. With couples, a first best that implies a lower retirement age for female workers can be implemented by a gender-neutral system. Otherwise, gender neutrality implies equal retirement ages and restricts the possibility of compensating the shorter-lived individuals (i.e., male partners). Calibrated simulations show that when singles and couples coexist, gender neutrality substantially limits redistribution in favor of single women and entirely prevents redistribution in favor of male partners.
Italy is among the European countries that still offer special benefits to working women. “Opzione Donna” allows women to retire up to one year earlier than men, at age 61, with a minimum of 35 years of contributions (Law No. 213/2023). This age requirement decreases by a year for each child to a maximum of two years. Eligible for this option are caregivers, women with disabilities, and those affected by layoffs or employed in financially distressed firms.
While the model proposed by the authors disregards childcare unequal responsibilities and other reasons for the gender gap in earnings, its results suggest that the policy debate on pension reforms overlooks some key facts: women’s longer lifespans and potential resource pooling within couples, where redistribution often benefits the lower-income spouse, typically the woman.
Some symbolic policies, like gender neutrality, are ineffective or even harmful as long as fundamental gender differences in earnings and longevity persist. The pension system is just one of the possible tools for redistribution; if the source of the gender gap in earnings is (unequal) childcare responsibility, other instruments, like compulsory paternity leave, childcare subsidies, and public provision of childcare, might be more effective.