Reviewequal opportunities - finance - wages

How to become rich
and get old happy

A wake-up call from the United States: with the pension system crysis, it becomes crucial to know how to manage our assets and make them bear fruit. And also, women are single in different stages of life and always longer: it is no more possible to leave the control of investments and savings to men.

Recently, I had the pleasure of reviewing a book written by Mariko Chang titled Shortchanged: Why Women have less wealth and what can be done about it (Oxford University Press 2012), for the Review of Income and Wealth.[1]

I found this book to be an important contribution to the scarce literature on wealth distribution, differences in accumulation across different household types and within couples for women and men.  

Compared to the gender wage gap, this topic is seriously understudied due to a relative shortage of wealth data compared to income data and the difficulty of untangling ownership information, i.e. control of assets within couples.

 Meanwhile, the importance of individual wealth building should be emphasized given that more and more women (and men) live in single-person households (about half of households are headed by single people and women nowadays are spending more of their adult years single rather than married), the sustainability of public pension systems is questionable and marriages can no longer be seen as a security blanket for old age.

The facts

In the United States, women earn 78 percent[2] of what men do, while they own 36 percent as much wealth. Never married women working full-time earn 95 percent as much as similar never-married men, but they only have 16 percent as much wealth. In case of job loss or other emergencies, this can make women extremely economically vulnerable.

Opportunities to build and lose wealth

 In the book, the author argues that processes that exist at the workplace, in the society, but most importantly within couples are in fact the cause and root of the existing gender wealth gap. In the end, she explains why a reduction in the gender wealth gap should be addressed for the society to benefit as a whole.

What I really like about the book is the way it conceptualizes factors that explain differences in wealth holdings between women and men. Traditionally, income or earnings were seen as a big source of inequality between the genders. This together with differential investment patterns and inheritance have translated into the wealth gap.  The author argues that a much stronger mechanism that allows for the creation (or destruction) of large wealth comes through access to the wealth escalator (debt anchor). 

Women do not have lower wealth levels just because they hold lower paying jobs or have a lower labor market attachment. A much stronger mechanism that allows for wealth creation are fringe benefits that are attached to these better paying jobs or jobs in the first place These fringe benefits could refer to special stock options, or occupational pension plans, which are also often accompanied with reduced tax obligations. Fringe benefits, in the US,  are mostly benefiting men, while women are left out of this important way to create wealth.

The other spectrum of the wealth escalator is the debt anchor. The author defines two types of debt: the "good" and the "bad." Women are argued to have more of the "bad"-destructive type of debt that is used purely for consumption purposes (mostly by women in financial distress). "Good" debt includes mortgages and educational loans; this debt allows people to accumulate more wealth and to benefit from tax advantages.

 Saving and investing is another aspect of wealth building. Here the biggest differences exist in the types of businesses men and women have. Women tend to have businesses in sectors yielding lower revenues. The author points out that owning one’s own businesses is what drives wealth at the top of the wealth distribution.  So why do these gender differences in portfolio composition exist? Here the author points to several facts that have been confirmed in the literature. Assets that allow wealth building generally require more risk taking and women have been found to have lower financial risk tolerance and lower financial literacy (Jianakoplos and Bernasek, 1998).

 

Couples 

Women in couples are also given a special place in the book and financial independence is stressed. Via the words of Virginia Wolff (a well-known feminist icon) : it (financial independence) " is by far more important than the right to vote." Wealth sharing within couples is often disregarded, because in the case of divorce, a 50-50 split of assets is assumed. But the point of non-cooperation within a couple occurs way before divorce, which leaves those financially savvy at a clear advantage.[3] 

 The author argues that within the marriage, the gap transfers from having less wealth to having less control over it[4] and argues for higher financial literacy among women that would allow them to make more sound financial decisions.[5]

As the author puts it (p. 106):

"women are (...) thrown into the financial "deep end" at the time when they are already stressed and vulnerable-at the time of divorce or widowhood.  If women are left in the dark with respect to finances or do not gain financial knowledge or the confidence that comes with experience, they are at a disadvantage when they must manage their assets to make ends meet as a single woman. "

Finally

Apart from documenting the precarious wealth situation for women, the author also proposes various solutions to help diminish the wealth gap. At the moment existing policies in the US are designed to help with equality of earnings and balance full-time employment and family responsibilities, but they do not necessarily place women on the wealth escalator.

 We learn why this is the case and are proposed various solutions. Some of these are well in place in other corners of the world, for example in Europe (Gornick and Meyers, 2003).

 This book will undoubtedly inspire many (including myself) to seek similar answers for Italy and Europe? Are policies in place in the labor market that allow women to accumulate wealth in a similar manner as for men? Is the wealth escalator equally accessible for women as it is for men?

 This book will be greatly enjoyed by economists and sociologist alike interested in learning more about the sources of differences in wealth accumulation between women, men and different household types. It is a clear, comprehensible and delightful read appropriate for interested readers outside the field, as well.  The author shows not just how decisions and preferences of individuals and households are formed, but the system in which Americans live in has far reaching consequences in terms of wealth accumulation and ultimately economic well-being. Given that reliance on private assets upon retirement will only increase this debate needs to be taken up.

References

Gornick, J.C. and M.K. Meyers, editors, Families that Work: Policies for Reconciling Parenthood and Employment, Russell Sage Foundation, 2003.

Grabka, M., J. Marcus and E. Sierminska, "Wealth Distribution within Couples," Review of Economics of the Household (forthcoming), http://link.springer.com/article/10.1007/s11150-013-9229-2, December 2013

Jianakoplos, N. and A. Bernasek, "Are Women More Risk Averse?," Economic Inquiry, 36(4), 620-630, 1998.

 

Sierminska, E. M., J. R. Frick, and M. M. Grabka, "Examining the gender wealth gap," Oxford Economic Papers, 62(4), 669-690,  2010.


[2] based on median annual earnings

[3] In the United States, only 9 states are community property states requiring this 50-50 split. In the remaining 41 common law prevails.

[4] Research for Germany finds that only 15 % of couples report within household equality (Sierminska et al 2010).

[5] Another paper looking at Germany has also found that the wealth gap is lowest in couples where the woman has the last word in financial decision-making. These couples are not the richest and it is difficult to determine causality, but it seems that equality of decision-making within couples allows for equality of wealth within couples (Grabka et al 2013).