A Dynamic Gender Analysis of Spain's Pension Reforms of 2011

Abstract

Gender differences in the labor market have been widely studied and discussed in terms of both research and public policy. One of the contributions of feminist economics has been to analyze and demonstrate links between gendered labor market experience and retirement incomes. This paper presents a methodology to study the dynamics of gender differences among retirees in Spain. The study provides a way to predict the effects of government policies proposed in 2011 that change the institutional framework of social security systems in an effort to address the fiscal challenges of an aging population.

Keywords:

• Gender poverty gap
• gender policy effect
• gender dynamics
• social security
• pension reform

JEL Codes:

• H55
• I38
• J16

NOTES ON CONTRIBUTORS

Patricia Peinado is Assistant Professor at the University of the Basque Country. Her research interests are applied econometrics, economics of gender, pensions, poverty, public policy, and social security. Her most recent co-authored contributions deal with the problem of poverty among pensioners from a general perspective as revealed by “A Dynamic Analysis of the Effects on Pensioners’ Welfare of Social Security Reforms,” published in the Journal of Pension Economics and Finance (2012), and specifically take into account the case of widow's pensions as in “A Dynamic Analysis of the Effect of Social Security Reform on Spanish Widow Pensioners,” published in Panoeconomicus.

ACKNOWLEDGEMENTS

I am grateful to Felipe Serrano, Badi H. Baltagi, and Irene van Staveren for support and useful comments, as well as three anonymous reviewers and editors and associate editors of Feminist Economics.

Notes

1 For an analysis of the effects of the reforms on welfare, see Barbara A. Butrica, Karen E. Smith, and C. Eugene Steuerle (2006); Marie-Eve Lachance (2008); Frédéric Gonand and Florence Legros (2009); and Patricia Peinado and Felipe Serrano (2012).

2 For a review of the research, see Therese Jefferson (2009).

3 Law 27/2011 on the actualization, adequacy, and modernization of the Social Security System.

4 In the year 2050, the old-age dependency ratio for Spain is estimated to reach 59 percent. In the EU-27, this ratio would be 50 percent.

5 In Spain, the baby boom occurred one decade later than in the rest of Europe. Consequently, the fiscal imbalance is due to appear later than in other European countries. However, the intensity of the imbalance is expected to be much higher in Spain than in the EU. This is related, on the one hand, to the higher dependency of the Spanish ratio and, on the other hand, to the decrease in compensation related to migration flows into Spain. For further reading, see Serrano, Eguia, and Ferreiro (2011).

6 In the literature, analyses of gender differences regarding pensions are based on simulations of the lifetime benefit patterns of pensioners. This is the case in James, Edwards, and Wong (2003), in which the lifetime benefits drawn by representative women and men are simulated, and in Bonnet, Buffeteau, and Godefroy (2006), which bases calculations on the microsimulation model Destinie.

7 Pay-as-you-go or unfunded plans are defined as those financed directly from contributions from the plan's sponsor or provider and/or the plan participant. Unfunded pension plans are said to be paid based on a current disbursement method. Unfunded plans may have associated reserves to cover immediate expenses or to smooth contributions within given time periods. Most Organization for Economic Cooperation and Development member countries do not allow unfunded private pension plans (OECD 2005).

8 Pension entitlement is a function of the taxable average earnings of the retiree during a specific number of years of her or his working life. Depending on the system's regulation, the years considered may comprise the entire working life, the years of highest contribution or, as is the case in Spain, the last years of contribution.

9 There are two reasons why women might retire earlier than men. On the one hand, because of the legislation on pensions, some systems establish an earlier legal retirement age for woman than for men. On the other hand, in systems in which regulations do not distinguish between men and women in terms of the legal retirement age, women may decide to retire earlier than men, in which case the effective retirement age for women would be lower than the effective retirement age for men. Tito Boeri and Agar Brugiavini (2008) study the effects of pension reforms in Italy on the retirement decision from a gender perspective.

10 Contribution is computed on the basis of fourteen wages (one for each month of the year and two extra payments). Contributions to the Social Security system, however, are made in twelve monthly payments. This is why Expression 2 amounts to 180 monthly taxable average earnings (the times the contribution has been made) but is divided by 210 (the number of wages to which it is related).

11 Those pensioners who do not contribute for fifteen years can be entitled another type of pension or means-tested benefit but not the social security contributory pension.

12 The new formula applied to compute the regulatory base is:

13 Following Rafael Muñoz de Bustillo, Fernando Esteve, Pablo de Pedraza, José Ignacio Anton, Jaime Frades, and Jos Maria Zufiaur (2008), it is assumed that each additional year included in the computation of the regulatory base generates a decrease of the average pension benefit initially entitled equal to 1 percent. Furthermore, the decrease is proven not to be different for each gender. Accordingly, the assumption is made for both men and women.

14 It is assumed that as a consequence of the reform, pensioners would continue to work and contribute for two more years.

15 The results obtained in the non-parametric estimates prove the existence of a non-monotonically increasing and then decreasing hazard rate.

16 The time-varying covariate included is external in the sense of John D. Kalbfleisch and Ross L. Prentice (1980) because the complete path features in Zj(t) are determined for the entire period analyzed, regardless of whether the pensioner has entered a welfare loss situation.

17 Following Tony Lancaster (1990), and to prevent estimates from being biased (to alleviate the problem of omitted variables), a Gaussian error component is assumed to control the presence of individual unobserved heterogeneity, which could arise in the absence of other important information regarding the pensioner, such as personal characteristics, that was not gathered in Zj(t).

18 The poverty threshold is defined as 60 percent of the Equivalized Median Income for households comprising one person between 1995 and 2007 (EUROSTAT 2009). For the 1986–94 period, the poverty line is defined as 60 percent of the Equivalized Mean Income, as estimated by Mercedes Prieto and Carmelo García (2007).

19 This reform does not imply a longer period of contribution during the pensioner's working life. The effect of the contribution period is estimated separately.

20 This is the assumption underlying the reform proposal made by the Spanish government.

21 The Spanish Social Security system comprises the general social security scheme, with which salaried workers, as a whole, are affiliated (71 percent of the total number of those affiliated) and a special self-employed workers’ scheme, with which those who are self-employed are affiliated (15 percent of the total number of those affiliated). The remainder of the system comprises several minor populations, such as fisheries workers or mine workers. This study focuses exclusively on pensioners who are part of the general social security scheme.

22 The standard pensioner is defined as one who draws a single pension and does not receive any means-tested complement for the entire period analyzed.

23 This extension of the data allows extrapolation of the information to the maximum extent possible and thus provides a gain in terms of efficiency. The calculation of the benefit uses the initial pension benefit entitled to the pensioner when she or he began to draw the benefit (that is, when no reassessment had yet been applied to the pension). It then adjusts to current rates from the starting date to the last year available (2007) by multiplying by the corresponding actualization factors, which are the corresponding CPIs for each year from 1986 to 2007.

24 A time-varying framework implies that some covariates change during each period. As a result, the hazard ratios concerning such types of covariates change each time the time-varying covariate changes. For this reason, and to simplify interpretation, the reported results show the average hazard ratio for the whole period analyzed; that is, the average over the hazard ratios of the period, as in Expression 12, where refers to the hazard ratio corresponding to covariate, q; refers to the hazard estimate value corresponding to the covariate; represents the baseline hazard estimate; and T is the total number of periods studied.

This time-varying framework is present through the entire study. However, the values are presented as averages only in Table 1 because the remainder of the research presents the dynamics explicitly and as functions (Figures 1–6).

25 Table 2 presents the estimates of the coefficients and the corresponding deviation standard for each variable. The interpretation of the results is in terms of hazard ratios.

26 A sensitivity analysis assumed that pension benefits are made current not only to CPI but also to productivity changes. Under this assumption, dynamics differ. The probability of being poor increases only for the first years that a pensioner draws the benefit and then remains constant. This behavior is true for men and women, although women, because of their lower pension benefit, show a higher poverty rate than men. Consequently, gender differences only increase at the beginning of the period and then remain the same for the time that the pension is drawn. For example, assuming an average real growth of 2 percent, the probability of being poor increases for the first four years, leading to increasing gender differences. From this time, the poverty situation does not change; consequently, gender differences stabilize for the rest of the period analyzed.

27 This is in line with the results obtained by Peinado and Serrano (2012).

28 Note that the baseline hazard represents the rate at which each gender reaches the poverty line.

29 Women's life expectancy is higher than that of men. Consequently, the tail end of the duration period is made up primarily of very old women.

30 In fact, the average effective retirement age for women in Spain is 62, whereas the average effective retirement age for men is 64 (recall that the legal retirement age is 65). This means that for men, the new regulation would be effective in terms of only one year of increase, whereas for women, the total increase in the effective retirement age (two years) would be quantifiable. Ultimately, increases in women's pension benefits would be higher than those of men, leading to a final improvement in terms of poverty for women over men.

31 Calculations were performed using the same average characteristics of the pensioners in the results analyzed previously. The present discounted value of future benefits is calculated as the sum over the discounted pension benefits drawn by pensioners:

where represents the expected present discounted value of future pension benefits in each case analyzed h for given gender j, represents the pension benefit drawn in period t by gender j, is the discount factor for each gender's period t, and Tj represents the life span of pensioner type j. Let us say that j=w denotes women and j=m denotes men, h=c denotes the current situation, and h=k refers to policy reform k. Then, the effect of the reform k for each gender j, is calculated as:

Finally, the gap in the effect of magnitudes between genders of the reform k, GME_k is computed as the difference of the effects of magnitudes of the reform computed for each gender:

The value of the discount factor is given by the value of the CPI corresponding to each of the twenty-two years analyzed from 1986 to 2007. This is the index the Spanish Pension System uses to bring pension benefits up to date. The different life expectancies at age 65 (legal retirement age) for men and women are used to compute the present discounted value of future pension income. Concretely, this life expectancy for women in Spain is estimated to be 21.7 years (), whereas it is 17.7 years for men (; INE 2010).

32 Note that this quantity differs from the average pension presented in the introduction. This discrepancy is because the data have been debugged and include the standard pensioners of the general scheme in social security.

33 Note that, on this occasion, the gain for men is equal to 0 given that the average male pensioner has contributed for the maximum period in the computation of the pension benefit. Thus, implementing the policy reform would have no effect on the pension entitled to the pensioner.