Gender Differences in Risk Aversion and Expected Retirement Benefits

Women are generally considered more risk averse than men. Controlling for age, income, and education, this study examined the impact of gender on the superannuation (retirement) fund risk preferences of staff in the Australian university sector. The findings suggest that women choose more conservative investment strategies than men and that lower income (which affects the amount members contribute to their superannuation funds) is the primary contributor to the lower projected retirement benefits of women. Providing members with a choice among risk levels in their retirement investments should significantly benefit male and female retirees. Concern has been growing that many retirees will have insufficient assets in retirement to meet their expected retirement liabilities (in particular, housing and health care) and life-style desires (for example, travel). This concern has fuelled considerable public policy debate and has led to significant superannuation fund (retirement fund) reforms in Australia and elsewhere. An important decision facing an individual contributing to a retirement plan (in addition to how much to contribute) is how best to invest the contributions to derive the maximum long-term benefit. As both history and theory advise, higher returns generally come at the cost of higher risks; therefore, individuals who choose to bear lower risk will generally earn lower returns—in the long run. Considerable empirical evidence suggests that women are more risk averse than men and are, therefore, likely to choose lower risk/lower return investment strategies. Research also suggests that women, because they usually earn less than men over their working lives, are likely to be less wealthy when they retire. The potential effects of these differences on the differential retirement benefits of men and women is compounded by the fact that women typically have longer life spans over which their retirement benefits must be allocated and also tend to retire earlier than men. This study aims to contribute to the existing literature in two ways. First, we sought to determine, in the Australian context, whether women are indeed more risk averse than men in their choices of superannuation investments. This study also illustrates the potential impact that increased risk aversion (and differences in working-life income) is likely to have on the retirement benefits of women compared with the benefits available to men. The dataset we used was provided by the superannuation fund UniSuper, the sole superannuation fund provider for staff (academic and general) at Australian universities during the period of the study, 1 July 1997 to 30 June 2003. When UniSuper began allowing members to choose their investment plans/strategies, all existing members (and, subsequently, new members) were asked to select a plan from among seven ranging from a cash investment to a very risky all-equity plan. The dataset contained details on 32,061 members who had selected an investment plan in the sample period. After controlling for age (negatively related to risk taking) and income (positively related to risk taking), we found the differences in investment choices of the average male and female UniSuper member to be statistically significant, but the dollar impact of the difference on expected retirement benefits was small (approximately AU$16,000 in total over a 35-year period from age 30 to age 65). Of far greater importance for expected retirement benefits was the difference in the average incomes (and thus superannuation contributions) of the men and women. This difference resulted in the average male UniSuper member having almost AU$195,000 more in expected retirement benefits at age 65 than the average female. Furthermore, we found that the average expected superannuation investment return for both male and female UniSuper members has been substantially greater since members have been given a choice of investment strategy than it was under the previous scheme in which no choice was available.