gender, risk, and retirement

Gender, Risk, and RetirementAuthor(s): Alexandra Bernasek and Stephanie ShwiffSource: Journal of Economic Issues, Vol. 35, No. 2 (Jun., 2001), pp. 345-356Published by: Association for Evolutionary EconomicsStable URL: http://www.jstor.org/stable/4227666 .

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J eI JOURNAL OF ECONOMIC ISSUES

Vol. XXXV No. 2 June 2001

Gender, Risk, and Retirement

Alexandra Bernasek and

Stephanie Shwiff

Women are more vulnerable than men to poverty in their older age. They earn less than men over their working lives and accumulate less savings for retirement. These savings typically have to be spread over a longer period of time since women live longer on average than men, and they must meet higher expenditures since women also experi- ence more chronic health problems as they age. Saving for retirement is increasingly taking the form of investment in financial assets. The proportion of private pensions that are defined contribution plans is increasing, and policy makers are considering the privatization of Social Security. In this environment women's well-being in retirement will depend more heavily on their attitudes toward risk and the impact of those attitudes on investment decisions.

There is evidence that women are more risk averse than men when their entire portfolio of assets is considered (Jianakoplos and Bernasek 1998, Palsson 1996). If women are on average less willing to take risks than men, they are also expected to accumulate less wealth on average, since lower risk is associated with lower returns on investment. Some researchers have looked specifically at pension assets and individu- als' willingness to take risks as evidenced by the allocation of their pensions to stocks versus bonds. Several studies have found that women invest their pension assets more conservatively than men-allocating a smaller percentage to stocks than bonds (Bajtelsmit and Vanderhei 1996; Hinz, McCarthy, and Turner 1996; Bajtelsmit, Bernasek, and Jianakoplos 1999).

The authors are Associate Professor and graduate student, respectively, in the Department of Economics, Colorado State University, Fort Collins, Colorado, USA. They are grateful to TIAA-CREFfor providing financial supportfor this research. Responsibilityfor any errors or omissions is theis alone. This paper was presented at the annual meeting of the Association for Evolutionary Economics, New Orleans, Louisiana, USA, January 5-7, 2001.

345



346 Alexandra Bernasek and Stephanie Shwiff

One of the major limitations of previous studies of gender and risk aversion is their inability to deal with the problem of who makes investment decisions in married and cohabitating couple households. If a female respondent who is married holds a risky portfolio of wealth, we do not know if this reflects her attitudes toward risk or her partner's, or some combination. Nancy A. Jianakoplos and Alexandra Bernasek (1998) tried to overcome this problem by comparing single women, single men, and married couples in terms of their risk aversion. They found that single women are more risk averse than single men and married couples. One of the problems with this is that single women and men are not necessarily representative of women and men in general. When looking at private pension allocation decisions, it seems more likely that the individual who has the pension makes the allocation decision with regard to the pension, but still it seems reasonable that a partner's attitudes toward risk (espe- cially as it affects how the household portfolio of assets is allocated) will have some effect on that decision. The purpose of this paper is to examine the determinants of an individual's allocation of defined contribution pension assets to stocks when we have detailed information about gender and the household financial decision-making process.

Data and Descriptive Statistics

The data used in this paper came from a survey of faculty employed at five universities in Colorado.' The data were collected in the form of a mail survey conducted in spring 2000. The purpose of conducting such a selective survey was to produce a rela- tively small data set with very detailed information about household financial decision making which could be used as a pilot study to see if the collection of such detailed information on a larger scale would be warranted. Also, by focusing on academics only, the issue of level of education was controlled for and a potentially more significant factor- the type of education or discipline-could be examined.

Given the specific nature of the questions asked in the survey, there were only 270 observations in our sample-those who had complete information on the percentage of their defined contribution pension invested in stocks, as well as on the other explanatory variables. Means of the variables are presented in table 1. The means of several of the variables differed by gender at the 1 percent level of significance. For example, male respondents were significantly older than female respondents on average. Men were also considerably more likely to be married than women, and women were nota- bly more likely to be single than men. One of the most dramatic differences was how much higher men's net worth was on average than women's. Men also had significantly higher income than women on average. Slightly less significant were some of the other differences in attitudes toward risk taking. Finally, male respondents more frequently than female respondents reported that their spouses/partners were willing



Gender, Risk, and Retirement 347

Table 1. Means of the Variables (Standard Errors in Parentheses)

Variables Sample Men Women Sex of Respondent 0.422

(.030) Percent of D.C. Pension in Stocks 71.333 72.282 70.035

(1.777) (2.502) (2.454) Age of Respondent 48.54 50.91 45.298*

(.602) (.829) (.771) PhD/Professional Degree 0.94 0.935 0.947

(.014) (.019) (.021) Masters/Bachelor 0.059 0.064 0.052

(.014) (.019) (.021) Married/Partner 0.77 0.865 0.64*

(.025) (.027) (.045) Single 0.229 0.134 0.359*

(.025) (.027) (.045) Spouse/Partner Job Full-Time 0.425 0.41 0.447

(.030) (.039) (.046) Spouse/Partner Job Part-Time 0.185 0.23 0.122*

(.023) (.033) (.030) Spouse/Partner Job Retired 0.044 0.051 0.035

(.012) (.017) (.017) Spouse/Partner No Job 0.225 0.23 0.219

(.025) (.033) (.038) Kids under 18 0.347 0.352 0.324

(.028) (.038) (.044) Financially Responsible for kids 0.418 0.455 0.368

(.030) (.039) (.045) Primary S&I Decision Maker 0.518 0.5 0.543

(.030) (.040) (.046) Joint S&I Decisions 0.062 0.057 0.07

(.014) (.018) (.024) Not Primary S&I Decision Maker 0.418 0.442 0.385

(.030) (.039) (.045) Respondent Greater than Avg Risk 0.525 0.57 0.464*

(.030) (.039) (.046) Respondent Takes Average Risk 0.437 0.378 0.517*

(.030) (.038) (.047) Respondent Unwilling to Take Any 0.029 0.038 0.017 Risk

(.010) (.015) (.012)

Continued on following page




Table 1. (Cont.)

Variables Sample Men Women Spouse/Partner Greater than Avg Risk 0.37 0.378 0.359

(.029) (.038) (.045) Spouse/Partner Takes Average Risk 0.348 0.416 0.254*

(.029) (.039) (.040) Spouse/Partner Unwilling to Take 0.048 0.064 0.026 Any Risk

(.013) (.019) (.015) Professional Financial Advisor 0.581 0.532 0.649*

(.030) (.040) (.044) Net Worth 607151.3 752392.6 408400*

(48424.39) (74124.6) (47985.05) Total Income of Respondent 79064.81 91355.77 62245.61*

(3200.153) (4874.265) (2968.383) Total Income of Spouse/Partner 32302.22 32285.9 32324.56

(3671.433) (5785.521) (3628.997) Expectation of Social Security 0.918 0.923 0.912

(.016) (.021) (.026) Business Degree 0.059 0.064 0.052

(.014) (.019) (.021) Arts & Humanities Degree 0.107 0.089 0.131

(.0188) (.022) (.031) *Indicates a significant difference in the means of men and women at the 1% level.

to take average financial risk. Female respondents were much more likely to take average financial risk than male respondents, and male respondents were more likely to state that they were willing to take above average financial risk than women. Interest- ingly, there was no significant difference in the average allocation of the pension to stocks between women and men.

Empirical Estimation

The research question to be examined in this paper is whether gender affects the percentage of an individual's defined contribution pension assets invested in stocks. Given information about gender and household financial decision making such as who is the primary financial decision-maker in the household2 and attitudes toward risk of the household members, we allow for multiple effects of gender in explaining the riskiness of an individual's defined contribution pension allocation.




Many studies have attempted to empirically measure an individual's degree of relative risk aversion-how the percentage of their wealth invested in risky assets changes when their wealth increases. The theoretical foundations for those studies were derived by Irwin Friend and Marshall E. Blume (1975). Although this study differs from the Friend and Blume study in important ways, the underlying research questions have enough similarities to justify using explanatory variables in the equa- tions estimated in this study that are comparable to those used by Friend and Blume. We are not able to establish a measure of risk aversion in terms of its strict economic usage, as Friend and Blume do. We do, however, have information about people's stated willingness to take risk, which gives us some information about their attitudes toward risk and how they affect their investment decisions. We are primarily inter- ested in whether or not gender is a significant factor in explaining the riskiness of pension investments. If we accept that the higher the percentage of the pension allocated to stocks, the higher the degree of risk associated with the investment of pension assets, and we find that the effect of being female lowers the percentage of the pension invested in stocks, then we can conclude that women invest their pensions more conservatively than men.

The equation we estimated is a two-limit Tobit with the percentage of the pension invested in stocks as the dependent variable, censored below at zero (none of an individual's pension is invested in stocks) and above at 100 (100 percent of an individual's pension is invested in stocks). The equation takes this form:

Retdcsi = fI+ P2sexli + 33ageli + N4agelsqi + P5phdpri + I6partneri + Pjob2f + P~/ob2pi + Pq9ob2ri + P1okdJ8i + Pllkdfini + P12hhsipi + P13hhsiji + P14brisklJ + P i5hhfrlai + P i6brisk2i + P17hhfr2ai + P18pfai + P,lgnworthi + P2Ototincli + P21totinc2i + P22expssni + P23busi + 024artsi ? Ui (1)

where

RETDCSi = the percentage allocation of the defined contribution pension to stocks sexli = 1 if the respondent is a women and 0 if the respondent is a man AGEli = the age of the respondent AGEISQi = the age of the respondent squared PHDPRi = 1 if the respondent has a PhD or a professional degree (e.g., DVM, MD) and 0 if not PARTNERi = 1 if the respondent has a spouse/partner and 0 if not JOB2Fi = 1 if the respondent's spouse/partner is employed full time and 0 if not JOB2Pi = 1 if the respondent's spouse/partner is employed part time and 0 if not JOB2Ri = 1 if the respondent's spouse/partner is retired and 0 if not




KD18i = I if the respondent has children under the age of eighteen living in the household and 0 if not KDFINi = 1 if the respondent is financially responsible for any children and 0 if not HHSIPi = 1 if the respondent is the primary savings and investment decision maker in the household and 0 if not HHSIJi 1 if household savings and investment decisions are made jointly and 0 if not BRISK]l = 1 if the respondent is willing to take greater than average financial risk and 0 if not HHFR1Ai = 1 if the respondent is willing to take average financial risk and 0 if not BRISK2i = 1 if the respondent's spouse/partner is willing to take greater than average financial risk and 0 if not HHFR2A = 1 if the respondent's spouse/partner is willing to take average financial risk and 0 if not PFAi = 1 if anyone in the respondent's household has received advice from a professional financial adviser and 0 if not NWORTHi = the net worth of the respondent TOTINC]i = the respondent's total income from all sources TOTINC2i = the total income of the respondent's spouse/partner from all sources EXPSSNi = 1 if the respondent or spouse/partner expects to receive Social Secu- rity at retirement and 0 if not BUSi = 1 if the respondent stated that his or her degree was in a business field and 0 if not ARTSi = 1 if the respondent stated that his or her degree was in the arts and humanities field and 0 if not

We estimated equation (1) in two stages. First, we included only a dummy variable for gender to see if gender had a significant effect on the riskiness of the pension portfolio, controlling for other factors including whether or not the respondent was the primary financial decision maker and stated attitudes toward risk of the respondent and spouse/partner (if any). A broad representation of disciplines was included with dummy variables for a degree in the liberal arts or a degree in business (the omitted dummy is for degree in the social and physical sciences and engineering). The results of the estimation of this equation are found in column 1 of table 2.

The most significant variable in the regression is gender. The effect of the respondent being a woman decreased the percentage of the pension invested in stocks. The effect of the respondent having a professional degree or PhD compared with a BA or MA decreased the percentage of the pension invested in stocks. If the respondent was the primary financial decision maker, the percentage of the pension invested in stocks also decreased. The effect of a spouse/partner's willingness to take substantial or greater than average risk for substantial or greater than average return, compared with




Table 2. Tobit Regression Results Dependent Variable: Proportion of Stocks in Defined Contribution Retirement Plan (standard error in parentheses)

(1) No Gender Interactions (2) Gender Interactions Sex of Respondent -12.165* -100.455

(5.424) (139.385) Age of Respondent 0.608 -1.263

(2.372) (3.039) Age Squared -0.018 -0.003

(.024) (.030) PhD/Professional Degree -20.065* -29.63*

(10.468) (13.476) Married/Partner -14.555 -35.341 *

(12.738) (16.879) Spouse Job Full-Time -1.413 -3.15

(8.332) (10.117) Spouse Job Part-Time -9.776 -1.634

(8.834) (10.127) Spouse Job Retired/No -7.64 -7.883 Work

(13.868) (16.431) Kids under 18 -5.046 6.731

(9.332) (10.924) Financially Responsible for -2.748 -14.878 Kids

(8.721) (10.088) Primary S&I Decision -I11.197* -18.325* Maker

(5.833) (7.449) Joint S&I Decisions -15.618 -26.652*

(10.404) (15.201) Respondent Greater than 18.029 6.728 Avg Risk

(10.106) (16.843) Respondent Takes Average -3.235 -13.182 Risk

(13.971) (16.352) Spouse Greater than Avg 17.638* 41.564* Risk

(10.279) (13.780) Spouse Takes Average Risk 11.201 34.089*

(10.275) (13.635)

Continued on next page




Table 2. (Cont.)

(1) No Gender Interactions (2) Gender Interactions Professional Financial Ad- 8.419* 9.395 visor

(4.910) (9.358) Net Worth 0 0

(0) (0) Total Income of Respon- 0 0 dent

(0) (0) Total Income of Spouse 0 0

(0) (0) Expectation of Social Secu- 0.952 20.578* rity

(8.791) (11.74) Business Degree 12.333 12.882

(10.173) (13.171) Arts & Humanities Degree -13.544* -19.73*

(7.831) (11.421) Female * Age of Respon- 3.315 dent

(5.638) Female * Age Squared -0.028

(.059) Female * PhD/Professional 15.299 Degree

(21.602) Female * Married/Partner 39.341

(26.943) Female * Spouse Job 4.421 Full-Time

(16.625) Female * Spouse Job -19.062 Part-Time

(20.696) Female * Spouse Job Re- 10.746 tired/No Work

(32.151) Female * Kids under 18 -22.799

(23.197) Female * Financially Re- 24.972 sponsible for Kids

(21.788)




Table 2. (Cont.)

(1) No Gender Interactions (2) Gender Interactions Female * Primary S&I De- 17.115 cision Maker

(12.604) Female * Joint S&I Deci- 15.405 sions

(21.256) Female * Respondent 6.437 Greater than Avg Risk

(33.212) Female * Respondent Takes 7.142 Average Risk

(32.783) Female * Spouse Greater -43.283* than Avg Risk

(20.491) Female * Spouse Takes Av- -46.251* erage Risk

(20.980) Female * Professional Fi- -0.862 nancial Advisor

(9.899) Female * Total Income of 0 Respondent

(0) Female * Total Income of 0 Spouse

(0) Female * Expectation of -36.267* Social Security

(18.059) Female * Business Degree -0.232

(21.404) Female * Arts & Human- 13.671 ities Degree

(15.709) Constant 117.644* 173.851 *

(61.122) (80.693) *Indicates a significance at the 1% level




a spouse/partner who was unwilling to take any risk, was to increase the percentage of the pension allocated to stocks. If the respondent or spouse/partner had consulted a financial planner, the percent of the pension allocated to stocks also increased. The effect of the respondent receiving the highest degree in the liberal arts compared with the social and physical sciences or engineering was to decrease the percentage of the pension invested in stocks.

Given the focus of this paper, the results of the first stage estimation with regard to gender and household financial decision making suggested a second stage estimation where the effects of gender were also allowed to include interaction dummies. Gender was interacted with all of the explanatory variables, in addition to being included as a variable on its own. The results of the estimation of the equation with interaction dummies by gender are reported in column 2 of table 2. The gender dummy is no longer significant in this equation. As before, if respondents had a PhD or professional degree, that decreased the percentage of their pension assets invested in stocks compared with respondents with BA or MA degrees. In this equation, the presence of a spouse or partner decreased the percentage of the pension invested in stocks compared with single people. The effect of a respondent's highest degree being in the liberal arts decreased the percentage of pension invested in stocks, as before. Also as before, if the respondent was the primary financial decision maker the percentage of the pension invested in stocks decreased compared with respondents who reported that they were not the primary or were joint financial decision makers. In this equation, if the respondent made financial decisions jointly with a spouse or partner, this also decreased the percentage they invested in stocks compared with respondents who reported they were not the primary financial decision makers in their households. In all of these cases, the results were not significantly different for women and men.

Where the results did differ significantly by gender was in terms of the effects of a spouse/partner's attitudes toward risk and the expectation that the respondent or the spouse/partner will receive Social Security. If the respondent was a man and his spouse or partner was willing to take substantial risk for substantial retum, greater than average risk for greater than average return, or even average risk for average return, that increased the percentage of the respondent's pension that was invested in stocks, compared with men whose spouse/partners where unwilling to take any risk. If the respondent was a woman and her spouse/partner was willing to take substantial risk for substantial return, greater than average risk for greater than average return, or even average risk for average return, that decreased the percentage of the respondent's pension that was invested in stocks compared with men whose spouses/partners were unwilling to take any risk. Similarly, if the respondent was a man and he or his spouse/ partner expected to receive Social Security, that increased the percentage of their pension invested in stocks compared with those who didn't expect themselves or their spouses/partners to receive Social Security. And if the respondent was a woman, the effect of expected Social Security was to decrease the percentage of her pension invested in stocks.




Conclusions

This paper explored the effects of gender on an individual's decision regarding how to invest assets in a defined contribution pension. We estimated an equation to explain the factors that affect the riskiness of that investment decision. In the initial estimation of the equation, allowing for the effects of gender through a single dummy variable, we found that the gender of the respondent was the most significant factor in explaining the percent of the pension invested in stocks. The effect of being a woman was to reduce the percentage invested in stocks. Most prior studies have found similar results women are more conservative investors than men.

Where this paper differs from other studies is in the inclusion of detailed information about household financial decision making and attitudes toward risk for respondents who are married or cohabitating. We were able to include this information and interact all the variables in the equation by gender to try to see more clearly how gender affects investment decisions in such households. The most significant differences by gender were found in attitudes toward risk. Our results showed that men who have spouses or partners who are willing to take at least average risk for average return take greater risk in the allocation of their defined contribution pensions than men whose spouses or partners are unwilling to take any risks. Women in the same situation take less risk in the allocation of their defined contribution pensions. This asymmetry is important because it seems to broaden the finding that single women are more risk averse than single men (Jianakoplos and Bernasek 1998) to show evidence of gender differences in risk taking among people who are either married or cohabitating. Our results show that married and cohabitating women and men react in opposite ways to the attitudes toward risk of their spouse or partner. Men's response to having a spouse or partner who is willing to take at least average risk for average return in investing their pension seems to indicate that they are probably more willing to take risks than their spouse or partner. On the other hand, women's response to having a spouse or partner who is willing to take at least average risk for average return in terms of taking less risk in how their pension is invested seems to indicate that they are probably less willing to take risk than their spouse or partner.

This study is important because it indicates that gender differences are a significant factor in explaining individual investment decisions, and they are not just an anomaly of single person households. It is also important because it indicates that data collection efforts must include more information about financial decision making within the household and individual attitudes of household members, such as attitudes toward risk. Finally, the study suggests that we should be concerned with any attempts to privatize Social Security that make retirement income more heavily dependent on risk taking, as they are likely to disadvantage women in their efforts to ensure ade- quate income in retirement.




Notes

1. The universities included in the study were Colorado State University, The University of Colorado at Boulder, The University of Colorado at Denver, University of Denver, and The University of Northern Colorado.

2. In this context the gender of the primary financial decision maker is given by the gender of the person who the respondent reports to be primarily responsible for savings and investment decisions in the household.

References

Batjelsmit, Vickie L., and Jack A. VanDerhei. "Risk Aversion and Retirement Income Adequacy." In Posi- tioning Pensions for the Twenty-first Century, edited by M. S. Gordon, 0. S. Mitchell, and M. M. Twinney. Philadelphia: University of Pennsylvania Press, 1997, 45-66.

Bajtelsmit, Vickie L., Alexandra Bernasek, and Nancy A. Jianakoplos. "Gender Differences in Defined Con- tribution Pension Decisions." Financial Services Review 8 (1999): 1-10.

Friend, Irwin, and Marshall E. Blume. "The Demand for Risky Assets." American Economic Review (De- cember 1975): 900-22.

Hinz, Richard P., David D. McCarthy, and John A. Turner. "Are Women Conservative Investors? Gender Differences in Participant-Directed Pension Investments." In Positioning Pensions for the Twenty-First Century, edited by M. S. Gordon, 0. S. Mitchell, and M. M. Twinney. Philadelphia: Uni- versity of Pennsylvania Press, 1997, 91-103.

Jianakoplos, Nancy A., and Alexandra Bernasek. "Are Women More Risk Averse?" Economic Inquiry 36 (October 1998): 620-630.

Palsson, A. M. "Does the Degree of Relative Risk Aversion Vary with Household Characteristics?" Journal of Economic Psychology 17: 1996.



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