According to a recent report by The People’s Pension, the gender pension gap in the UK is twice the gender pay gap. I had a sneak preview of research done by NOW: Pensions and the Pensions Policy Institute (PPI) where they analyse the key drivers behind the pension gap. Altogether it is a worrying read. So, what is really going on here and what can we do about it?
In short, closing the gender pay gap is not sufficient for solving the gender pension gap. The majority of part-time workers are women, and women, more often than men, take career breaks caring for young children and aging relatives. In the State Pension, the introduction of State Pension credits have helped reduce the gender pension gap. But the problem remains in the workplace pension which is built on the general assumption that all individuals will work full-time without career breaks.
The family contract
Our biological mission, as mammals, is to make sure that our off-spring survive until reaching reproductive age. Many of the behavioural biases that economists observe have been formed by evolution as they were successful in achieving our biological mission. It is naïve, on the verge of ignorance, to expect that our biases will not play central a role when a young family tries to juggle work, childcare and being good parents.
In many families it may play out in the following way, which an economist probably would describe as the family contract. The lowest earning parent, which often is the woman, takes ‘one for the team’ and stops working. In the UK, it is easy to understand this decision. The cost for childcare is so high that the overall economic situation will not significantly deteriorate if one parent stops working. The working parent, often the man, focusses on their career.
Faced with family decisions, we end up choosing solutions that satisfy our immediate needs. Under the influence of our biases we make implicit assumptions under which our decisions make perfect sense to us. But reality might turn out quite differently than our rosy assumptions about the future. The family contract is ‘fair’ to both partners if, and only if, it lasts for life, but the Office for National Statistics (ONS) projects that 42% of all marriages end in divorce. In addition, most of us do not expect to be seriously ill or having periods of unemployment, but it happens to more of us than we think. Our economist would argue that from an income stability perspective it is more robust with two income earners in the family. Good luck trying to share these statistics with proud parents!
Solution – policies designed for mammals
Almost all parents consider their children to be the most important thing in their life. So the best we can do is to accept our mammal instincts and design polices that support the daily life of most people. One of the biggest challenges for a young family is how to practically deal with childcare.
An expensive childcare system, such as in the UK, is an exceptionally firm societal nudge that pushes parents towards entering the family contract. Our economist would argue that the cost of childcare should be viewed as implicit marginal tax on the lowest income earner in the family. Lowering, or capping, the childcare cost would neutralise this nudge, by making it meaningful for both parents to continue working full time.
For those couples who decide to enter the family contract, policies should be designed in such way that the partner that ‘takes one for the team’ will not end up in a poverty trap at old age after a potential divorce in the future. Therefore, it seems reasonable to allow for workplace pension contributions to be shared and ensure the inclusion of pension rights/pots in all divorce settlements.
These suggestions will help narrowing the gender pension gap with respect to the size of the pension pots at retirement. But that is not enough, the gender pension gap at older ages will to a large extent depend on how the pension pot has been transformed into a retirement income. More about that next month…
Stefan Lundbergh, Director, Cardano Insights