Improving Women's Retirement Security

June 24, 2014 | By Jon Vogler

Jon Vogler
Senior Analyst,
Retirement Research,
Invesco Consulting

For many reasons, women may be at a greater risk than men of not achieving a secure retirement. The Joint Economic Committee hearing on May 21 heard testimony about why women as a whole generally face more obstacles than men in reaching a secure retirement and what steps can be taken to improve their situation. In this edition of Washington Insights, we'll explore these issues and potential solutions.

Retirement security: Why so elusive for women?

Most women face three major hurdles in trying to achieve retirement readiness:

  1. They generally live longer than men.
  2. They typically fulfill the role of caregiver for children and others.
  3. Many older women have been disadvantaged because the transition from a defined benefit (DB) to defined contribution (DC) retirement system changed how retirement savings are passed on to widows.


Let's look more closely at each of these hurdles.

1. Longer life expectancy. Debra B. Whitman, Executive Vice President of Policy, Strategy and International Affairs for AARP, pointed out that compared with men, women generally must finance more years of retirement because of their longer life expectancies (about five years longer at birth and almost three years longer at age 65). Moreover, most women have less income and retirement savings to finance those additional years. Complicating matters further, older women are more likely than older men to live alone and need long-term services and support, such as a nursing home. They also tend to incur greater out-of-pocket health expenses.

2. Caregiving and its effect on income and benefits. Women's employment and earnings have risen significantly over the past several decades. But despite their growing contributions to household earnings, women continue to be primary caregivers for young children, aging parents and other family members or friends. These responsibilities can have significant negative impact on women's long-term financial security.

Largely because of caregiving responsibilities, Ms. Whitman observed, women are more likely than men to work part time, spend more years out of the labor force and have shorter careers. They are also more likely to work in lower-paying occupations and may pass up promotional opportunities. These gender differences in employment — earnings, job type and tenure — help explain why older women typically receive less than older men from the three traditional sources of retirement income — Social Security, pension and individual savings.

  • Because Social Security benefits are based on a person's average lifetime earnings, workers with higher lifetime earnings receive more retirement benefits than workers with lower lifetime earnings. In April 2014, the average monthly retirement benefit was more than 20% lower for women ($1,139) than men ($1,456).1
  • Jobs in low-paying industries are less likely to offer retirement plans than other jobs, and part-time workers are less likely than full-time workers to be covered by a retirement plan. As a result, women have historically been less likely to participate in an employer-provided retirement plan.
  • Lower earnings limit the ability of women to save for retirement. Median retirement assets for female workers near retirement age (55 to 64) are estimated to be about half of those of their male counterparts ($34,000 versus $70,000).1

Because older women have fewer sources of other retirement income, they are more dependent on Social Security benefits. Social Security is currently the principal source of family income for 53% of older women and nearly the only source (90% or more) of family income for about one in four women, compared with about one in five older men.1

3. Shift from traditional pensions. Brigitte Madrian, Aetna Professor of Public Policy and Corporate Management at the Harvard Kennedy School, observed that in the shift away from DB and toward DC retirement plans, the financial security of women in retirement depends very much on how wealth accumulated for retirement is managed. With a traditional DB pension, the default payout for a married couple is a joint and survivor annuity; anything else requires spousal consent. But DC assets are largely not annuitized in retirement, leaving women vulnerable if assets aren't managed to last for their longer life expectancies. The implications of the shift from a DB to a DC retirement system on the well-being of older women haven't received sufficient attention in either academic or policy circles, according to Ms. Madrian.

Retirement readiness: How can women overcome the obstacles?

Helping women prepare sufficiently for retirement can be addressed on many fronts.

Encourage retirement savings through improved access and plan design. Increasing retirement savings can play a pivotal role in improving women's retirement security. A recent study found that access to a workplace retirement savings plan or pension is second only to having a job as the most important factor in helping moderate-to-low income individuals build retirement security.

Policies that can help encourage more women to save more include:

  • Increasing their access to a workplace retirement plan.
  • Increasing the adoption of automatic plan enrollment and automatic escalation of worker contributions.
  • Strengthening tax incentives for retirement savings.

Emphasize the importance of working longer. The economic benefits of working longer are significant, particularly as life expectancies increase for much of the population. Not only does working longer reduce the number of years savings must cover, it also adds earnings that may boost Social Security benefits, provides more opportunity to continue savings, and results in additional pension credits.

A person must be willing and able to work longer, but job loss, caregiving responsibilities or poor health may preclude doing so. According to Ms. Whitman, more flexible work schedules might enable a greater number of older workers — particularly women who bear the bulk of caregiving responsibilities — to stay attached to the labor force longer.

Promote financial education and lifetime income product innovation. Gender disparities in work experience and longevity signal the need for financially innovative products and increased financial education and planning to improve financial security for both older women and men, noted Cindy Hounsell, President of the Women's Institute for a Secure Retirement (WISER).

The little understood role of lifetime income products, such as immediate annuities and longevity insurance for those age 85 and over, needs more focused discussion. Both immediate and longevity annuities could play an important role in providing future retirement security for women. Industry focus on further lifetime income product education and innovation would serve women well.

Financial education in the workplace plays an important role in helping people understand the value of retirement benefits. According to Ms. Hounsell, financial information should be targeted to women as spouses and caregivers, as well as employees. Experience and research show that relevant financial information can help dramatically increase total net worth by nearly one-third for those with the lowest income and 18% for those with moderate income.2

Encourage automatic IRAs

The Automatic IRA proposal offers a comprehensive approach to expanding both access to and participation in retirement savings plans, observed Rachel Greszler, Senior Policy Analyst in Economics and Entitlements in the Center for Data Analysis at the Heritage Foundation. It also enjoys widespread bipartisan support. Under the Automatic IRA, employers could choose from a variety of privately administered IRA plans with little to no cost to them. In addition, the automatic enrollment of workers in the plans would significantly increase the number of workers who participate in retirement savings plans.

Modify Social Security

For most Americans, Social Security is the only source of guaranteed lifetime income, which is an especially important protection for women because of their greater longevity. This protection is reinforced by automatic cost-of-living adjustments, a feature that most retirement programs don't provide. Because women tend to live longer than men, this guaranteed lifelong stream of inflation-adjusted payments provides the basis of financial support for women as they age, even as other financial assets are exhausted and expenses, such as health care costs, continue to rise.

These two possible policy options include basic variations for improving Social Security benefits for those who have worked as family caregivers without earnings or with low earnings for a certain number of years:

  • A specified earnings credit that would provide a set amount of earnings for each year of caregiving for child or parent when the caregiver's actual earning was zero or greatly reduced from previous years. This credit would be provided for a specific number of years, such as three to five.
  • Modification of the traditional Social Security benefit formula would help workers who take time out of the workforce by adjusting their Social Security benefits. The Social Security Administration would drop out a set number of caring years from the highest 35 years required to determine the benefit.

Improving women's retirement security: What can we do?

During her testimony, Ms. Hounsell highlighted a number of key approaches to help improve women's retirement security:

  • Provide benchmarks for determining retirement readiness or when retirement is affordable.
  • Protect, preserve and strengthen Social Security, which is critical for women's financial well-being.
  • Improve benefits for low-wage workers because those with minimal benefits are primarily low-wage, unmarried and widowed women.
  • Study ways to offer retirement protection to women who spend significant time as caregivers, including providing Social Security credits.
  • Support employer plans, recognize the difference between employment experiences of men and women, and promote individual saving behavior.
  • Encourage more employers to offer a retirement program and make it easy for employers to do so.
  • Encourage plan sponsors offering 401(k) and similar plans by providing better default investment options to enable more savers to accumulate more assets for retirement.
  • Extend retirement savings opportunities to part-time and temporary workers.
  • Enable later retirement and support better work options at later ages.
  • Study the interaction between increasing longevity and retirement ages and develop a dynamic system to keep retirement ages in step with greater longevity.
  • Promote incentives for older workers to continue working and improve employment training and retraining programs to better serve older workers.
  • Encourage financial product innovation that helps older Americans preserve and protect their retirement incomes and assets.
  • Support and encourage continued sponsorship of retirement plans with risk-protection features, such as lifetime income options.
  • Support development of more products that include combining income and long-term care.
  • Encourage employers to offer meaningful and appropriate financial education programs and assistance.

Turning the retirement tide for women

Women generally have lower incomes than men, and due to caregiving responsibilities, women are more likely to step out of the work force for a time or work part-time. In addition, the decrease in the number of people getting married and the likelihood that married women will outlive their husbands will affect the Social Security benefits of women. Enhancements to Social Security, expanded retirement plan access, plan design changes and increased financial education are among the ways to improve women's retirement security.

Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. It was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under US federal tax laws. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation.

The opinions in this piece are those of the author and are not necessarily those of Invesco. Information in this report does not pertain to any Invesco product and is not a solicitation for any product.

1 Source: Statement for the Record, Joint Economic Committee, Hearing on Women's Retirement Security, May 21, 2014. Submitted by Debra B. Whitman, Executive Vice President, Policy, Strategy and International Affairs, AARP.
2 Source: Joint Economic Committee, Hearing on Women's Retirement Security, Hart Senate Office Building 216, May 21, 2014. Statement of M. Cindy Hounsell, JD, President, Women's Institute for a Secure Retirement (WISER).