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

The World Bank’s Women, Business, and the Law Index has documented a persistent gender pension gap in rich and poor countries alike. This is partly because of gender-based legal disparities, such as a lower mandatory retirement age for women and the lack of pension credit for periods of childcare. Because women have shorter working lives, earn less, and have higher life expectancy than men, they often receive lower benefits, which must last longer.

But the problem is most acute in low- and middle-income countries. Around two-thirds of the world’s population aged 60 and older live in the developing world, and that share is projected to rise to 80% by 2050. Many of these countries do not adequately index pensions to inflation; instead, they apply discretionary increases when fiscal space is available. And, as Sri Lanka’s recent restructuring has shown, the mounting sovereign-debt crisis threatens to erode retirement savings further, pushing even more older women into poverty.

After defaulting on its foreign loans in early 2022, the Sri Lankan government agreed to restructure both its external and domestic debt, as required by its bailout agreement with the International Monetary Fund. The adjustment has had dire consequences for the Employees’ Provident Fund (EPF), the country’s largest superannuation fund, which is managed by the Central Bank of Sri Lanka and covers nearly 60% of the private-sector and semi-government workforce.

In September, the CBSL announced that the EPF had two options for its portfolio of treasury bonds under the domestic-debt restructuring plan. The first was to increase the tax rate applied to the EPF’s investment income to 30% – more than double the current rate of 14%. The second was to exchange the treasury bonds for new ones with lower interest rates of 12% per year until 2026 and 9% after that, a sharp drop from the current average rate of more than 20%. The CBSL’s Monetary Board opted for the latter, although both scenarios would have shrunk retirement savings significantly.

While this is bad news for all elderly Sri Lankans, who are already the country’s poorest group, it will disproportionately hurt older women. To be sure, they receive fewer benefits to begin with, given that the EPF caters to workers in formal employment, and women’s participation in the labor market has consistently remained low, at 30-35%, over the last few decades. But even women without direct access to these savings often rely on them indirectly, because they are financially dependent on men or collect their deceased spouse’s benefits.

More importantly, the feminization of aging has lengthened the retirement period for Sri Lanka’s women, who not only live six years longer than the country’s men, but are also eligible to claim their benefits under the EPF at age 50, whereas men must wait until age 55.

This matters because, as a defined-contribution plan, the EPF provides the mandatory contributions paid by employers and employees, together with accumulated interest, as a lump sum at retirement. In 2021, the EPF paid an average benefit of around $2,000 – equivalent to only four years of average consumption per person, based on central-bank data. Women must therefore stretch this already inadequate amount over more years than men. And with lower bond yields, workers will receive an even smaller lump sum.

This illustrates the threat that domestic-debt restructuring poses to women’s income security and economic dependence in old age. It also highlights the importance of safeguarding pension funds to ensure the welfare of elderly people more generally.

Instead of treating all treasury bonds equally, Sri Lanka’s restructuring plan targeted those held by retirement funds (as opposed to financial institutions or private stakeholders). Moreover, the EPF’s beneficiaries had no way of pushing back against this policy, because neither employees nor employers have a say in the fund’s management.

To improve transparency, the EPF board must be restructured to ensure that member interests are represented in the decision-making process. After all, beneficiaries bear the risk of mismanagement. Employers and employees of both genders could hold the board accountable for its investment portfolio, 93.4% of which was in rupee loans, treasury bonds, and treasury bills in 2020, and resist changes that reduce their retirement savings. For example, the policy to tax the EPF’s investment income, which was originally tax-exempt, was implemented despite opposition from employees.

The law that established the EPF should be changed to make the retirement age the same for men and women, and to establish crediting mechanisms for periods of childcare. Following the lead of other countries, Sri Lanka should spur more competition in the retirement-fund market, which would give beneficiaries more choice and, in turn, encourage more service-oriented fund management. Finally, individuals should be given a greater say in the management of their pensions.

In the long term, ensuring the economic welfare of older women in Sri Lanka – and across the developing world – requires thoughtful and adequately financed measures to improve their access to formal-sector employment. But in the meantime, policymakers must establish more transparent and accountable systems for retirement-fund management to shield wage workers’ pensions from further cuts.

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