From time to time the issue of the gender pay gap is raised in the media and in society, but have you ever thought about the pension income gap? It seems simple enough: if there is a pay gap, then there will be differences in the amount of pension savings. Clearly, salary plays a big role, but there are other factors affecting the amount of future pension, and there are significant differences between genders.
According to the Central Statistical Bureau, in 2020, the gross gender pay gap was 22.3%. Here, the job ads on the employment website Indeed spring to mind here, with their simple but thought-provoking illustrations: would you be willing to pay the same amount for ice cream that is 22% smaller, or an umbrella that is 22% short of fabric? Of course, these numbers are based on a multitude of factors, including career interruptions to care for children. Moreover, these interruptions in working life also have to do with the amount of future pensions.
According to the results from the SEB Pension Readiness Index Survey*, 17% of women have spent 3 to 5 years, one-fifth of women (20%) have spent 2 to 3 years, while 16% of women have spent 1 to 2 years out of their active employment on parental leave. How can we translate these years into numbers? Let’s take the example of the average salary in Latvia – 1,277 euros. As is well known, the total amount of national social security mandatory contributions that flow from the gross salary of each employee into the pension capital is 20%. Of this amount, 14% goes to the 1st pillar pension and 6% is automatically paid into the 2nd pillar pension each month. Thus, out of 1,277 euros, 76.62 euros go to the pension capital of the 2nd pillar each month. During parental leave, the State continues to pay contributions on behalf of the person taking parental leave. The basis of contributions from which this 20% is calculated is the same regardless of whether the person worked and paid social security contributions before the parental leave – it is the amount of the childcare allowance, i.e., 171 euros per month. Thus, in total, only 34 euros a month go into the pension capital during parental leave. On the upside, there is also good news. This year, the Latvian Parliament passed amendments to the law under which from July 2022, contributions to the pension fund will be made from the total amount of parental allowance and childcare allowance. This is a nice step towards reducing injustice. The question remains how this injustice for women and men who took parental leave before these amendments can be reduced?
To date, termination of employment not only has a significant impact on the future retirement of many women but also hinders their career and salary growth opportunities. Studies show that it takes women seven years to reach the same level in the labour market as men who have been in the labour market the entire time. And this is just one of the aspects that affect gender pay and also the pension gap. Moreover, after returning from parental leave, the salary is often not reviewed and adjusted to the current economic situation but kept at the previous level. According to the European Parliament, 30% of the total pay gap between men and women is due to the high proportion of women in relatively low-paid sectors. Another important aspect is that women in management positions are often paid less and far more women than men work part-time.
At the same time, we note that the possible duration and conditions of parental leave in Latvia are currently very good against European backgrounds. In Lithuania and Estonia, the situation is similar – a family-friendly parental leave policy, but this creates a “gap” in pension savings. The old saying applies here - a stick has two ends.
What can we do ourselves to improve our future financial well-being at least somewhat? One of the options is to save voluntarily for the 3rd pillar. Of course, as a parent's income decreases during parental leave, it is often possible to use a smaller amount than before to save, but 3rd pillar pensions are flexible - the regularity and amount of contributions are determined by the saver, and small contributions can make a big difference in the long run.
So one option might be to make regular contributions to the 3rd pillar to at least somewhat close the “gap” in future pension savings.
However, according to our data, women become more active in saving for the 3rd pillar when they reach the age of 40, which is probably due to the fact that children have become more independent and will soon start school. In contrast, men are more likely to start saving after age 30.
Why is it important to start saving early? A considerable amount can be saved with smaller but regular contributions. For example, to save 50 thousand euros for old age, 44 euros per month must be set aside if one starts saving at the age of 30, but as much as 84 euros per month at the age of 40.**
It is clear that the difference between salaries and pensions cannot be explained by a single factor - the causes are complex and so must be the solutions. But this is what we can do today and ourselves to boost our confidence in future prosperity - it's worth thinking about and acting upon!
* The survey was commissioned by SEB in December 2020 and was carried out by the market research company TNS Emor.531 Latvian employees aged between 18 and 55 participated in it.
**Calculation assumptions: A person sets aside savings until the age of 65 with an average annual investment result of 5%
Head of SEB Pension Fund