Pension Caregiver Credits and the Gender Gap in Old-Age Income

Francesca Truffa and Ashley Wong, Northwestern University

In the United States, women receive 33 percent lower retirement income than men and the poverty rate of women aged 65 or older is almost twice that of men in the same age group (Jankowski, 2011). Major factors include more frequent employment interruptions, lower wages, and more part-time work resulting from childcare and other caregiving duties. Following the examples set by other OECD countries, U.S. policymakers have proposed adopting caregiver credits to compensate caregivers for time spent out of the workforce to care for children or elderly relatives. Despite near- universal adoption of these credits in European countries, limited empirical evidence exists on the effect of these programs on the pre-retirement labor supply of mothers and on the gender pension gap. Importantly, understanding these effects can help shed light on the important distributional consequences of such policies. This paper addresses this research gap by studying a 2001 German public pension reform that introduced caregiver credits for working mothers with children between the ages of 3 and 10. We utilize detailed German administrative social security data combined with a difference-in-differences design to estimate the pre-retirement labor supply responses and pension contributions. Based on our empirical results, we will build and estimate a lifecycle model to predict future pension benefits of the treated mothers and investigate the welfare effects of the policy. In the final part of our analysis, we will use the model to compare the cost-effectiveness of caregiver credits to alternative policies that aim to encourage labor market participation of mothers but do not directly increase pension income, such as childcare provision and income tax subsidies.