No. 17  Social Security Reform and Women's Pensions
By Alejandra Cox-Edwards

The Chilean population is expected to age rapidly in the course of the generations born from 1960 to 1980. The fraction of individuals 65 years or older will increase from 6.1% (1990), to 12.7%(2025), and to 17.3 (2050). Such a change in the demographic composition of the population will likely exhaust traditional support systems of the elderly, and increase the relative importance of life-time savings, including social-security benefits. Thus, a policy approach that does not distort incentives to save for retirement becomes is important for the well being of the population as a whole.

In 1981 Chile replaced a mature government-run social security system that operated on a pay-as-you-go basis, with a privately managed system based on individual retirement accounts. Overall, the new system is more fiscally sustainable. At the same time, incentives towards using the social security system to channel savings towards retirement changed, particularly for married women.

This paper examines the levels of income per capita and living arrangements of the current elderly by sex, estimates their poverty rates, and compares these with the poverty rates for the younger population. In addition, it estimates future pension benefits for the current generation of contributors, by sex, in an effort to establish the likely effects of reform on the living standards of elderly men and women. The key data source for the statistical analysis is the micro data set of the 1994 Caracterización Socioeconómica Nacional (CASEN), a nationally and regionally representative household survey.

The 1994 cross section shows that women are less likely to earn income than men in any of the categories of income generation. Yet, in the case of retirement income, gender differences are relatively smaller. In urban areas, the fraction of elderly men that receive an old-age pension is twice as large as that of elderly women – 62 vs. 31 percent. But, an additional 19 percent of elderly women receive survivor’s pensions, closing the retirement income gender gap. In rural areas, where old-age pensions are less typical, more than 23 percent of elderly women are beneficiaries of a PASIS, a government program targeted to the elderly poor. In urban and rural areas, older women are more likely to be widows, and more likely to live in extended households than men of the same age group. An interesting finding for the case of Chile is that poverty rates –measured at the household level using equivalency scales, are generally lower among elderly males and females, compared to younger males and females. However, controlling for age category, poverty rates are higher among females.

In the future, old age pensions are expected to be lower for women than men, because women accumulate funds at a lower pace, can retire 5 years earlier and are expected to live longer than men. However, a close examination of the impact of reform reveals that it brought about significant changes in women's incentives to participate in the labor market, to save, and to use the social security system as a channel for their savings. In fact, the elimination of cross subsidies within the system is a source of complex effects on the relative position of women. Under the new system’s rules: (1) there is no minimum level of contributions to obtain a pension; (2) contributions at a young age get an increased weight via compound interest; (3) widows can keep their own pension benefits in addition to their widow's pension. These three characteristics raised the marginal benefit of own contributions for working women relative to what the old system offered. In addition, the new system guarantees a minimum pension (MPG) for those that have contributed a minimum of 20 years, adding another incentive for participation. Transfers associated to the MPG are funded from general taxes and survivor’s pensions are funded via distribution within households. In effect, married men are required to build a joint annuity leading to a within-family distribution towards women. Therefore, the new system eliminated a significant degree of regressive distribution from working families to elderly widows with no contribution of their own, but with generous pensions as a function of their spouses’ pensions.

Overall, the new system is more fiscally sustainable and creates an incentive for greater labor force participation. Which system is preferable? If one thinks of labor market behavior as immutable and women's place as in the home, some method of subsidizing women in old age may be necessary. But, if one views the role of women as changing and responding to incentives, the new structure is more appropriate way to provide a social safety net while encouraging work and discouraging dependency.

This paper is part of a series of papers on selected topics commissioned for the forthcoming Policy Research Report(PRR) on Gender and Development. The PRR is being carried out by Elizabeth King and Andrew Mason and co-sponsored by the World Bank’s Development Economics Research Group and the Gender and Development Group of the Poverty Reduction and Economic Management Network. Printed copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Owen Haaga, in room MC8-434 or at Comments are welcome and should be sent directly to the author(s) at

The full-length paper is available in PDF format.