Maternity penalty: up to $318,000 in retirement savings affected by women

Christina Leung, senior economist at the New Zealand Institute of Economic Research. Photo/Mike Scott.

Women who choose to leave the workforce or work part-time after having children could lose between $58,000 and $318,000 in retirement savings, a study by NZIER has found.

The economic consultancy was commissioned to examine the main drivers behind the 20% gap between the average KiwiSaver balances of men and women by public provider KiwiSaver Kiwi Wealth.

He revealed that labor market participation, the pay equity gap, career gaps and changes due to motherhood and lack of confidence and knowledge of the retirement savings plan were at the root of the gap.

Christina Leung, senior economist at NZIER, said she wanted to quantify the effect of each driver and offer policy solutions that could help narrow the gaps.

“We know there is a gap, but the magnitude of it was large enough for us to assign a value to each of these drivers so that we are aware…and know which of the policy interventions would have the most for your silver. “

The biggest financial negative came from missing work and not continuing to contribute to KiwiSaver.

NZIER found that a median-earning woman who continued to work full-time for her entire life could achieve a savings balance of approximately $513,000 by age 65.

But if she had a child at age 30 and didn’t return to the workforce at all at age 65, that would be reduced by $318,000.

A woman who took a year off and then worked three days a week for the rest of her working life would take a hit of $122,000. It would be reduced to $58,000 if she returned to full-time work at age 40.

Even taking only a year out of the workforce on parental leave resulted in a $15,000 reduction in retirement savings.

“It just shows that given the flow of retirement savings from contributions, any interruption in contributions or any drop in contributions has an impact on the flows and it gets worse over the years,” Leung said.

The study also looked at research that showed that women tend to be more risk averse or less confident when it comes to investing and were more likely to be in a conservative fund compared to a fund. of growth.

Based on an average annual return of 2.5% for a conservative fund versus 4.5% for a growth fund, someone who stayed with a conservative fund for their entire working life would have $298,000 less to retirement.

“Each year might not seem like a lot, but compounded over the years, from 18 to 65, it really adds up. At the end of the day, it’s about making people more aware of the choices they’re making. are doing and the impact it will have on their retirement savings, and from there, we can think about ways to address these inequality issues that arise.

To a lesser extent, reducing the gender pay gap would also help. There is a 9.1% pay gap between men and women. The NZIER study found that closing the gap would increase a woman’s retirement savings from $55,905 to $742,763 if she was in a growth fund.

When it came to examining policy options for closing the retirement savings gap, four stood out as having the greatest potential impact: employers continuing to make contributions while their worker was in parental leave, making payments to account for maternity and care, closing the pay equity gap and implementing a non-conservative default option (this has already been changed to balanced) .

Leung said he recognizes that asking employers to continue contributing to KiwiSaver while an employee is on parental leave has a cost that can be quite significant for small businesses when costs are already high.

“If a policy were to be put in place, we would recommend that the government start with the public sector first by leading the way and then with the big organizations.

“So stagger the start so companies have time to prepare.”

She said some organizations are already paying employer dues for those on furlough.

When asked if this could deter employers from hiring workers of childbearing age, Ask Leung said he recognizes the potential.

“But when we think about what we want to achieve in the long term, it’s an environment where all men and women can fully participate in society while juggling other commitments.”

Rhiannon McKinnon, Managing Director of Kiwi Wealth.  Photo / Dean Purcell
Rhiannon McKinnon, Managing Director of Kiwi Wealth. Photo / Dean Purcell

Rhiannon McKinnon, chief executive of Kiwi Wealth, said he had asked for the research to add to the review of KiwiSaver being carried out by the Department for Business, Jobs and Innovation.

The Pension Commission is also due to submit its triennial report on retirement income policy to the government by the end of this year.

“We have a dual role as a KiwiSaver provider and wealth manager and as an advocate for all Kiwis, in line with our stated goal of ‘Enabling Kiwis to have a brighter financial future’. One way that we seek to achieve this goal is to lead the discussion and debate around areas where KiwiSaver can be more equitable for women.

“We have known for some time, particularly based on data from our State of the Nation Investor Report, that part of the gender gap in savings is due to a lack of confidence in investment, even though women are generally in charge of household expenses and are as good at making financial decisions as men. Unfortunately, this drop in confidence means that women are much less likely to be happy in their lives. today and much more likely to be stressed about their ability to retire.

“We need to move the dial, and this pervasive issue has fueled our support for more independent research and analysis such as this report, and our education campaign targeting girls and women, as knowledge increases confidence and commitment.

“We are actively sharing the recommendations with government, business and our industry partners so that we can collectively improve our services and products and how we inform all Kiwis of their retirement savings options.”