The economic problem of retired women in low and middle income countries

The World Bank study

Women, Business and the Law

has documented a persistent gender pension gap in numerous countries, rich and poor alike.

This divergence is partly due to gender-based legal disparities, for example, different retirement ages and the lack of accreditation of childcare periods.

Because women have shorter working lives, earn less, and have a longer life expectancy than men, they often earn less money in retirement and have to make it last longer.

But the problem is worse in low- and middle-income countries.

Around two-thirds of the world's population aged 60 and over live in developing countries, and the proportion is expected to rise to 80% by 2050. In many of these countries, pensions are not properly indexed to inflation. , but are increased discretionally when there is fiscal space for it.

And as Sri Lanka's recent debt restructuring shows, the worsening sovereign debt crisis threatens to further weaken retirement savings and throw more older women into poverty.

After defaulting on foreign creditors in early 2022, the Government of Sri Lanka agreed to restructure external and internal debt, as stipulated by the bailout agreement reached with the International Monetary Fund.

The adjustment brought dire consequences for the Workers' Provident Fund (EPF), the country's largest retirement fund, which is managed by the Central Bank of Sri Lanka (BCSR) and covers almost 60% of the private and semi-public sector workforce.

In September, the BCSR announced that under the domestic debt restructuring plan, the EPF had two options for its public bond portfolio.

The first was to increase to 30% (more than double the current value, which is 14%) the tax rate applied to the income that the EPF receives from its investments.

The second was to replace current public bonds with others with a lower annual interest rate, 12% until 2026 and 9% thereafter, a marked reduction from the current average yield, which exceeds 20%.

The BCSR's monetary policy committee opted for the latter, but either option implied a considerable reduction in retirement savings.

This is bad news for all elderly Sri Lankans, who are already the poorest section of the country, but it will affect women the most.

To begin with, they are less covered, because EPF benefits are for workers with formal employment, and female participation in the labor market has always been low, 30% to 35% for several decades.

But what happened will affect even women without direct access to these savings, since many depend financially on a man or collect the pension of a deceased husband.

Stretch payments further

The feminization of aging has lengthened the retirement period of Sri Lankan women, who not only live six years longer than their male counterparts, but can also apply for EPF retirement at the age of 50, while men must wait until 55. This matters because the EPF delivers the result of the mandatory contribution of employees and employers plus the accrued interest in a single payment at the time of withdrawal.

In 2021, this payment was on average around 2,000 dollars (1,856 euros), a figure that according to central bank data is equivalent to four years of consumption for a typical person.

An in itself inadequate sum that women have to stretch for more years than men.

And by reducing the interest rate paid by public bonds, the single payment that workers receive will be even lower.

This is an example of the risk that domestic debt restructuring poses to women's financial security and economic independence in old age.

It also highlights the importance of pension funds being protected, to ensure the well-being of the elderly population in general.

Sri Lanka's restructuring plan did not treat all public bonds equally, but specifically targeted those held by pension funds (and not financial institutions or private bondholders).

Furthermore, EPF beneficiaries had no way to oppose this policy, because neither employees nor employers have a say in the management of the fund.

To improve transparency, the EPF board needs to be restructured so that members' interests are represented in the decision-making process (after all, mismanagement is a risk for beneficiaries).

Thus, employers and employees (of both genders) will be able to hold the board of directors accountable for the institution's investment portfolio and oppose changes that reduce retirement savings.

For example, the decision to tax EPF investment income (which was initially exempt) was taken despite opposition from employees.

The law that established the EPF must be changed so that the retirement age is the same for men and women, and mechanisms must be created that allow childcare periods to be accredited.

Furthermore, Sri Lanka should follow the example of other countries and encourage greater competition in the pension fund market, offering beneficiaries more alternatives while encouraging a service philosophy in the management of the funds.

Finally, beneficiaries must be given more participation in the management of their pensions.

In the long term, ensuring the economic well-being of retirees in Sri Lanka (and in all developing countries) requires thoughtful and well-funded measures to improve beneficiaries' access to jobs in the formal sector.

But in the meantime, authorities must create pension fund management systems with more transparency and accountability, to protect employees' pensions against further cuts.

Translation: Esteban Flamini

Nisha Arunatilake is research director at the Sri Lanka Institute of Policy Studies and researcher at the Partnership for Economic Policy.

Copyright: Project Syndicate, 2024. www.project-syndicate.org

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