Is widowhood out of date in the 21st Century?

Transcription

1 The Year 2000 International Research Conference on Social Security Helsinki, September 2000 Social security in the global village Is widowhood out of date in the 21st Century? Linda ROSENMAN The University of Queensland Queensland 4069 Australia I NTERNATIONAL S OCIAL S ECURITY ASSOCIATION (ISSA) RESEARCH PROGRAMME CONFERENCE HOSTS: FINNISH ISSA MEMBER ORGANIZATIONS

2 Summary Internationally, social security systems are being privatised, usually through individual accounts which pay earnings-linked benefits to the individual worker. Whether, and how, privatised social security programs can provide family income protection is an issue. In Australia, the older population is predominantly female, and, particularly at the oldest ages, predominantly widowed. Although women are becoming more financially independent through employment, families remain economically interdependent and women continue to carry the costs of family care. The end of a marriage through widowhood or divorce is a threat to income security of the survivor that privatised income security programs must address. While measures can be designed to ensure that economic provision is made for surviving partners and families, government regulation of private arrangements is often questioned. Introduction As the twenty first century opens, social security systems throughout the world are undergoing reanalysis and change. The reanalysis is based on questioning the appropriateness of social security systems, predominantly developed over the past century, for the emergent work, retirement, and family patterns of the 21 st century. The new models that are emerging are usually earnings based contributory systems of individual worker accounts. These individual employment linked accounts provide an earnings linked benefit at retirement, or permanent disability for the individual worker, they are less likely to provide the family or social protection that has been a characteristic of many government managed social security schemes. Whether, and how social and family protection should be expected or required in individual earnings linked non publicly managed retirement funds is a difficult issue. Researchers in several countries have raised questions about the implications for women, and for families of shifting from social security towards individual investment accounts for retirement. Research and analysis has suggested a particularly negative impact on the economic well being of women, particularly widowed women, in old age (James, 1999; Hurd & Wise, 1991; Williamson & Rix, 1999). In Australia, as in many other countries, the retirement aged population is predominantly female, and particularly at the oldest ages predominantly widowed. Single older women are amongst the lowest income groups in the population. This paper addresses the question of if and how social security programs, specifically the new partially privatised systems, can provide income protection on a family basis. The focus is upon women who become widowed although divorce is also considered due to its growing prevalence. It uses Australian data i to 1

3 develop a picture of the changes that have been occurring in marital dissolution and the evidence regarding the income and asset situation of widows. It then goes on to look at issues in terms of planning financially for widowhood, under an income security system that is privatising. Section One: Widowhood in Australia As in many countries, social security programs in Australia use the individual or the marital couple (with or without dependent children) as the unit for payment, largely based upon assumptions of financial dependence based upon marital status. The continuing importance of marital status within the social security system means that it is important to identify patterns in marital dissolution. Table 1: Marital Status of Older Persons Age group (years) Age group (years) Marital status Total Women (thousands) Currently married Percentages Widowed Divorced Total Men (thousands) (a) Currently married(a) Percentages Widowed Divorced Includes persons who are separated but not divorced. Source: Estimated Resident Population by Marital Status, Age and Sex, Australia, June 1976 (Cat. No ); Marriages and Divorces, Australia, 1997 (Cat. No ). 2

4 The incidence of widowhood has been falling over the last 25 years. There has been a significant drop in the proportion of the female population aged under 80 that is widowed, although in the over 80 age group, proportions of widows have remained constant. There are now many more women in the older age cohorts, so the absolute number of widows is growing and increasing longevity means that the duration of time spent living as a widow has not decreased. The likelihood of becoming widowed is much higher for women than for men reflecting lower male longevity and the pattern of women marrying older men. Age at retirement for men has fallen substantially over the past 20 years. This suggests that men are likely to die after a much longer duration of retirement from the paid workforce, hence retirement income savings are likely to have been depleted. While the rate of widowhood is falling, divorce rates have increased. Divorce is more likely to occur in mid life (i.e., 40-60) so many more women are entering retirement single. Projections suggest that within the next two decades divorce rates will exceed widowhood as a cause of singleness amongst older women (Gibson, 1999). Amongst younger women there has been a delay in the age at marriage, although many people are in economically co-dependent relationships without entering into a registered marriage. Although a proportion of those who have delayed marriage will marry at some point in their lives, it is likely that there will be a significant number of women who remain unmarried (not necessarily unpartnered) throughout life. Section Two: Survivorship Protection in the Australian Social Security System In Australia Social security is used to describe a comprehensive non contributory income and asset tested social assistance system funded from Government general revenue which provides a safety net for loss of income through loss of earnings capacity (through retirement, unemployment, disability) or loss of an income earning partner (through divorce or widowhood). Australia has recently (1993) added a second pillar of income protection for retirement to its existing first column of social security and its third pillar of a (tax advantaged) private occupational superannuation system. The latter was available only to certain employees. The second pillar, the Superannuation Guarantee is a government mandated scheme requiring employer contributions for each employee of 9% of wages, paid into an individual retirement 3

5 savings account. With the introduction of compulsory superannuation through the Superannuation Guarantee, private employer superannuation schemes are not expanding. Furthermore many defined benefit superannuation schemes are converting and becoming defined contribution schemes. Individual savings accounts labeled superannuation are now a growing component of provision for income security in old age and widowhood. It is the government s intention that, over time superannuation will replace social security as the main source of income for old age. Survivorship Protection under Social Security Death of a husband gave widows eligibility for government income support since early in the 20 th century. During the war, a War Widows Pension was introduced which gave for the widow of a man who was killed in military action or as a result of injuries deriving from military action. In 1942, a Widows Pension was introduced under which women were entitled to a means tested pension if they had dependent children (aged under 18), or if they were aged over 50 on the assumption that they could not be expected to re-enter the labour force after a lifetime of home duties. Widowhood was treated as a threat to income that was not within an individual s control, and so needed special treatment. This was unlike divorce, sole parenthood, or unemployment, all of which carried some implicit element of blame, were treated less generously by the income security system, and were subject to work and dependency tests and often to intrusive investigation. In the 1980,s with the development of a more active social security system which expected people to reintegrate with the labour market, and following almost two decades of growing female labour force participation, the expectation that women should not be in paid employment once they were married began to change. The growing incidence of divorce, and of unmarried parenthood also raised questions about why women in similar economic situations should be treated differently on the basis of the way in which they had become single. This culminated in the Widow s Pension being phased out in the early 1990 s. Thereafter all income eligible single parents with dependent children received the same pension under the social security system, and were subject to active labour market policies that sought to 4

6 reintegrate pension recipients into the workforce. The special pension for women who became widows after the age of 50 was to be phased out, however a Widows Allowance was introduced in 1995 for older women who had lost the support of a spouse later in life and who had no recent workforce experience. From 1997, eligibility was extended to women aged at least 50 years who were widowed, divorced or separated after turning 40 years of age. In recognition that older women who become single late in life are likely to face major difficulty with workforce entry or re entry, there is no activity or job search requirement. When widowhood occurs after pensionable age (60 for women but rising to 65 in 2012), a widow is eligible to apply for the means tested Age Pension. Survivorship Protection Under Superannuation Income protection against death of a spouse has also been available through superannuation. The kind of coverage and level of protection differs between defined benefit and defined contribution schemes, and between schemes that pay the benefit at retirement as a pension in comparison with those that pay it as a lump sum. Survivorship Protection Under Defined Benefit Schemes Defined benefit (DB) schemes usually pay a benefit at retirement on a formula based upon final salary and years of membership. Such schemes have characterised the third pillar of the Australian retirement incomes system; employer occupational superannuation. DB schemes usually carry a life insurance component (either directly through the scheme or through insurance cover purchased by the fund) whereby the spouse of a deceased worker is entitled to a pension on his account. Although the amount is usually determined by formula, there may be discretion for Boards of Trustees to pay an added allowance to the survivor, particularly if there are dependent children. Survivorship Protection Under Defined Contribution Schemes The compulsory national superannuation scheme introduced in 1993 requires contributions for workers to be made into a defined contribution scheme. Under defined contribution (DC) schemes, the benefit at retirement is based upon the accumulation of contributions and investment returns. 5

7 In the event of death of a covered worker, a designated beneficiary receives the accumulated benefit. A financially dependent spouse or partner can be at risk if the amounts accumulated are small, which is likely both because schemes are still maturing, and/or if the deceased partner is young or has only limited covered work history. Potentially, the scheme member may not have updated the beneficiary designation in the event of partnering or repartnering, creating the possibility of legal challenge to the beneficiary. In addition, most defined contribution schemes allow members to purchase additional life insurance coverage through the scheme for an additional charge. Reportedly relatively few members take up this option. Currently legislation is pending for splitting superannuation entitlements at divorce. ii On the positive side, this recognises the non monetary contributions made by women to family financial well being, and the consequent financial disadvantage that many women face at retirement. On the negative side, it reduces the bequest for a survivor in the event of a repartnering. (Commonwealth of Australia, 1999) Widowhood After Retirement The most common situation is that widowhood occurs in later life after the benefit has been claimed at retirement. In this case survivorship provision depends upon the form in which the superannuation is received. At retirement superannuation benefits are usually paid as a lump sum, although there are tax advantages for people to use their lump sum to purchase an annuity. If the death occurs after the benefit has been claimed, the entitlement for a survivor would only be as a beneficiary of the estate unless the scheme member has converted his lump sum benefit to an annuity or pension upon retirement, and that pension has a survivor benefit. The annuity market is still developing, however, only a minority of those who take out annuities currently take out a joint and survivor annuity. Some large defined benefit schemes (predominantly public sector schemes) provide a pension with reversionary coverage for a surviving spouse. These often pay a percentage (usually 40-60%) of the primary beneficiary s pension to the survivor. Occasionally survivorship pensions are gender specific - coverage for widowers is often not automatic, and it is almost always based upon heterosexual marital or defacto relationships. Attempts to remove gender and marital discrimination in this area have faced considerable opposition. 6

8 Section Three: Economic Status and Widowhood. Due to the low (and declining) incidence of widowhood before old age, the economic situation of widows needs to be examined in relationship to couples and single men of comparable age cohorts. Data used are population surveys from the Australian Bureau of Statistics, and data from a national survey of financial planning by older women (Rosenman & Rixon, 1999). Table 2: Income of Aged People (65 and over) by Living Situation Married Lone Lone Men Couples Women(a) Median annual income $18096 $10,192 $9,672 Principal source of income Wage or salary 5.1% 0%.4% Own business or partnership 2.9% 0% 1.2% income Government 65.9% pensions/allowances Other income 25.9% (a) The vast majority of single older people are widowed. Source: Australian Bureau of Statistics, 1996 Survey of Income and Housing Costs. As is shown in Table 2, income is substantially lower for older single people than for married couples with a median income for singles slightly over half of that for couples. Amongst single older people 82.4% of women compared with 75% of older men and 65.3% of couples reported that a government pension or allowance was their principal source of income. This pattern of lower income amongst single people than amongst couples in the same age cohorts is common in many countries. Arguably, however, a married couple requires more income than a single person. The data are cross sectional, and there is a confounding of age, marital status, and age cohort. People are most likely to enter retirement as part of a couple, and become widowed later in retirement, by which stage assets and income accumulated for retirement are more likely to have been fully or partially consumed, such that they become eligible for the full rate of age pension. There is also a cohort factor. Amongst the oldest old relatively few had access to 7

9 savings or superannuation schemes or enough disposable income to be able to accumulate extra assets. Consequently, their independent income sources are likely to have been limited both before and since retirement. Data from a survey of women suggest a high rate of dependence upon government benefits amongst older single and married women. The growth in private superannuation as a major source of income for women is notable, as is the reliance of married women in particular upon a partner s superannuation, and the small number of widowed women who reported receiving a husband s life insurance. Table 3: Sources of Income by Age and Marital Status (Retired Respondents) Sources of Income Widowed Married Age Group (N=5) Retired Age pension or other government benefit (N=35) 70+ (N=34) (N=15) (N=57) 70+ (N=27) Own superannuation Partner s superannuation Casual or part-time employment Insurance policy Source: Unpublished data from Rosenman and Rixon (1999) Table 4: Assets by Marital Status by age Assets by Age and Marital Status Assets Widowed Married / Defacto Divorced/ Separated Age Group (N=9) (N=40) 70+ (N=35) (N=87) (N=75) 70+ (N=31) (N=30) (N=19) Work superannuation Other superannuation Shares Life insurance Real estate Managed funds Bank savings/bonds Source: Unpublished data from Rosenman and Rixon (1999) 70+ (N=4) Assets appear to be more limited for divorced and widowed women than for married women. In comparison with married women of the same age, widowed women are less likely to report owning superannuation, stocks and shares, life insurance or other savings vehicles such as mutual funds or certificates of deposit. Asset ownership also appears to be age related, older women, particularly those aged between 50 and 70 have a greater spread of assets. The 8

10 reality is, however that many of the older women who are married are likely to become widowed at some point in their lives and so inherit and need to manage assets. The capacity to manage assets then becomes a major issue for women. It is something that they need to be able to do before they become widowed. Women s expectations for how they would manage in the event of threats to income security such as widowhood suggest that women who are married appear to expect much greater financial provision to be made for them by a partner, through superannuation, life insurance and investments than is apparently the case for those who have been widowed. Table 5: Actual and Predicted Sources of Income in Widowhood by Marital Status Sources of Income Widowed Married (N = 178) (N = 59) Column Percentages Actual Predicted Government pension Superannuation(own and partners) Income from shared investments Life Insurance Return to work Can t say 8.4 Source: Unpublished data from Rosenman and Rixon (1999) The apparent differences between widows and married women of comparable age in terms of assets and income sources suggests that amongst older couples, income dies with a spouse. This could be due to lack of planning or economic provision being made by men for their wives should she (as is likely) survive him. If this is the case, it may be that the availability of the government funded Age or Widows pension is either seen as a more secure source of income for the spouse, or that its availability creates a form of moral hazard whereby, because the government provides an income guarantee through the age pension for the spouse, a man can choose to use superannuation or assets for consumption while he is alive rather than forgoing consumption to make provision for his survivor. There is no direct evidence of this, although the greater reported assets of married women may suggest this, as may the limited extent of survivorship provision being made through annuities. There is also some anecdotal evidence of men arranging their affairs to ensure that their widows are eligible for the age pension, which reduces the amount of income and asset 9

11 management required of a spouse who, it may be feared, may not have the acumen to manage financial affairs A more likely explanation, however, is the limited income and assets of the majority of the current generation of older people due to the limited incentives, opportunities, and capacity to save for old age when they were earning. Improvements in male mortality means that widowhood is occurring in more advanced old age, by which point income and assets have been run down through dissaving to provide income in retirement. There may, quite simply be little remaining for most men to leave to their survivor. Section 4: Planning for Marital Dissolution in Privatised Income Security Systems The growth of superannuation and the growth of female employment and superannuation coverage are potentially the solution to poverty in old age for widows. As women s rates of employment and so their savings or superannuation grow, economic dependence on a partner is likely to decrease both during working life and in old age. Although more women are likely to have some superannuation on their own accounts, the amount accumulated is likely to continue to be limited by their lower earnings and more limited work life experiences. As female education rates increase they are less likely to follow the work patterns of their mothers and grandmothers and permanently withdraw from the work force for family care. Nevertheless, families remain economically interdependent, and in most families, women still carry the cost of bearing and rearing children by limiting their labour force involvement, so lowering their incomes, and their lifetime income earning potential. The economic interdependence of family units will continue to provide a challenge for governments despite the development of individual income security programs which base their membership and their entitlements on the individual worker rather than on the family unit. The question is one of the extent to which government should go beyond mandating fund membership to specifying the who should be scheme beneficiaries, and the conditions under which they should receive benefits. 10

12 Options for Survivorship Whether and how governments should regulate to require family and particularly survivor protection in fully or partially privatised social security schemes are a complex issue. Despite changes in women s employment patterns towards more full time and life long employment, and the narrowing of the male female earnings gap, the reality is that many women continue to organise their employment around partner and family demands (and societal expectations). Consequently their lifetime earnings are low and the risk of economic insecurity if and when their marriage ends remains high. As James (1999) has pointed out: The absence of labor force participation and asset ownership among women was part of a traditional family system in which husbands participated in the formal markets and wives worked in the home. Women provided nonmonetized services, especially when young, while their monetary needs were supposed to be covered by their spouses and eventually their children. But in many cases this system fails, especially in old age, when women are at the receiving end of the lifetime contract. Marriages break up and the husband is the one with the formal income. Husbands die earlier than wives, with their retirement benefits used up, and often do not leave adequate resources to support the surviving spouse. For the foreseeable future the economic situation of older women is unlikely to change substantially. The majority of women who are currently over the age of 50 are not in the work force, and those who are have had limited access to superannuation, and will have correspondingly small amounts of retirement savings on their own account. Given female longevity, the problem of low incomes is likely to continue amongst older women unless they can access a partner s superannuation. Amongst the recommendations suggested to protect women in the event of marital dissolution through death or divorce include: A requirement that men contribute toward the personal accounts of their non-working wives. This has been addressed in Australia. Rather than mandating male contribution to a wives superannuation or personal account, a tax rebate has recently been permitted for a taxpayer who contributes to the superannuation account of a partner who has less than $13,800pa in taxable earnings. Potentially this provides an incentive to men to be aware of their responsibility of providing for a non earning 11

13 partner. The criticism is that this becomes a tax benefit predominantly for high earning males, who can afford to take advantage of it. It is unlikely to be economically feasible for the majority of single wage earner families or for low income dual earner families. In 1998 only 16,475 or.001% of taxpayers claimed this rebate Mandatory retirement savings be considered the joint property of both spouses. Ways of encouraging women, and men to view mandatory superannuation as the joint property of both spouses may be positively influenced by the introduction of the requirement for entitlement splitting at divorce. As Chart 1 shows until old age the majority of women are unlikely to plan for threats to income security through loss of a partner. This suggests that there may be only limited potential for influencing women to address the joint ownership of private superannuation plans until it is too late. Chart: Threats to Income Security Considered by Age 60 Divorce/separation Partner's death Partner's disability Partner's unemployment Age cohort Source: L. Rosenman, Planning for Uncertain Futures. Mandatory annuitization, with price indexation, so that the money accumulated in the workers accounts is not quickly used up and does not fall in real value. In Australia the rate of taxation on benefits taken as an annuity is much lower than on those taken as a lump sum in order to encourage annuitization. Nevertheless annuities 12

14 in and of themselves do not give survivorship protection unless they are joint and survivor annuities. Mandatory joint annuities, so that the lifetimes of both spouses are covered; this has been in existence in the United States for twenty five years. The Employee Retirement Income Security Act (ERISA) in 1974 required that at retirement, the default payout to married workers at a minimum must be a joint and one half survivor annuity. The Retirement Equity Act in 1984 added the requirement for a spouse s notarized signature if a retiree wants to reject a joint and survivor annuity option. These regulations are credited with substantially increasing the percentage of widows who received a survivor pension and thereby with an improvement in the economic situation of widows. (Holden & Nicholson, 1998). The introduction of these provisions would, certainly in the longer term benefit women as widows. Requiring a life insurance policy to be included in mandatory superannuation schemes rather than allowing it to be elective as at present. This would ensure that there is guaranteed income protection for survivors of members of defined contribution schemes. At issue is the extent to which governments should intervene in intrafamily economic arrangements, and privately managed superannuation schemes for socially desirable ends. A precedent for this has been set with the intervention for superannuation splitting in the event of divorce, however intervention to specify the form in which people should take, and manage their superannuation entitlements would be seen by many as an unwarranted interference in private matters and a potential distortion of markets for annuities and superannuation. To some extent too legislating to require that men provide financially for their wives should they be left as widows has overtones of paternalism and of traditional assumptions regarding women s capacity to earn and manage money. At a minimum such encouragement, or requirements should be gender neutral and be based upon a recognition of the financial interdependence of long term personal relationships rather than assumptions about female economic dependence. It is true that many older women have traditional attitudes towards money management and retirement planning, viewing it as men s business Nevertheless attitudes appear to be changing In 1988 in a national survey women were asked about their attitudes towards 13

15 responsibility for financial planning. In 1998 these questions were repeated in a comparable national survey. In 1988 one quarter (25%) of the sample responded that their partners did the financial planning and organising for retirement. A decade later this had dropped to 9%. In both surveys this response was more common amongst older women (60+) than amongst younger women. (Rosenman & Rixon, 1999) Furthermore many people now have greater levels of investment and assets than in previous generations. Focusing only upon superannuation risks overlooking other assets that may be owned, and acquired during a marriage, the management of which may make the difference in terms of financial independence when a marriage ends. Conclusions Widowhood is becoming a less common occurrence in modern societies, and its occurrence is being pushed back into advanced old age. Nevertheless most married women face the prospect of becoming single, particularly in old age due to dissolution of a marriage through death or divorce. Although women are becoming increasingly financially independent of husbands, families remain economically interdependent, with women still carrying the major responsibility for family care, which contributes to lower lifetime incomes and earning capacities. Family income protection remains a major issue for income security programs. Women appear to expect that partners will provide for their future financial security through superannuation, and insurance, however currently this seems to be the case for only a relatively small minority of widows. Privatisation of social security programs through individual retirement income accounts raises questions about if, and how, the social protection and family that has been an integral part of 20 th century social security programs can be assured as Government funded systems become the residual program to individual, employment based savings accounts. Mandatory individual superannuation is now almost universal in Australia, and the amounts accumulated are growing, ways of guaranteeing that economic provision is made for surviving partners and families is now becoming necessary. 14

16 References Commonwealth of Australia Attorney Generals Department. (1999). Property and family law: Options for change. Gibson, D. (1999). Older women in Australia. In The Office of the Status of Women, Women in Australia, Canberra, ACT. Holden, K. & Nicholson, S. (1998). Selection of a joint and survivor pension Institute for Research on Poverty Discussion Paper no , University of Wisconsin-Madison, WI. Hurd, M. D. & Wise, D. A. (1991). Changing social security survivorship benefits and the poverty of widows. Working Paper No. 3843, National Bureau of Economic Research, Cambridge, UK. James, E. (1999). Coverage under old age security programs and protection for the uninsured: What are the issues? Paper presented at the Inter-American Development Bank Conference on Social Protection, Washington, DC. Rosenman, L and Rixon, K. (1999) Planning for Uncertain Futures. Reprint on 1998 Survey of Women and Financial Planning. Williamson, J. B. & Rix, S. E. (in press). Social security reform: Implications for women. Journal of Aging and Social Policy. i A major survey on women s retirement issues was carried out in 1998 by Professor Linda Rosenman of the University of Queensland. This national survey examined the attitudes and actions of Australian women ages 20 and older with regard to retirement and various financial matters related to the retirement years. It also assessed the extent to which Australian women were planning for life events that were likely to impact negatively on their financial status and their planning for retirement. ii This amendment to the family law act requires that superannuation interests belonging to both members of a divorcing couple be split at divorce by agreement, or if this cannot be reached are split equally according to the duration of the marriage 15