Risk Classification and Sex Discrimination in Pension Plans
McCarthy, David D., Turner, John A., Journal of Risk and Insurance
Risk Classification and Statistical Discrimination
How do I know you will be a favorable juror, a long-term employee, a successful student, a profitable insurance or credit risk, or a responsible tenant? People are heterogeneous in their risk characteristics, and information about them is imperfect. One way to classify people in terms of risk is to use information about average risks for identifiable groups, a practice called statistical discrimination because the generalizations may be false for many individuals. While the U.S. federal government recognizes the validity of this practice for some individual characteristics--such as years of schooling completed--it prohibits statistical discrimination for other characteristics--such as race and religion--to protect demographic groups that have historically been discriminated against.
Government efforts to prohibit statistical discrimination have extended also to regulation of risk classification by sex. In 1978 and again in 1983, the U.S. Supreme Court issued decisions based on the Civil Rights Act of 1964 that prohibit pension plans from using separate mortality tables for men and women to determine contributions and benefits (Los Angeles Department of Water and Power v. Manhart, 435 U.S. 702 |1978~ and Arizona Governing Committee v. Norris, 51 U.S.L.W. 5243 |July 6, 1983~). Women, in general, outlive men so they receive pension benefits over a longer period of time. The Court argued that using separate mortality tables causes discrimination against women because they would receive lower annual benefits or pay more for equal benefits than men with identical work histories. In Los Angeles Department of Water and Power v. Manhart, the Supreme Court ruled that employers cannot require women to make larger contributions to a pension plan in order to receive the same monthly benefits as similarly situated men. In Arizona Governing Committee v. Norris, the Supreme Court ruled that women cannot receive lower monthly benefits than men who had made the same contributions.
The Supreme Court's rulings are now part of a larger body of regulation and law governing sex-based risk classification. In 1986, the Equal Employment Opportunity Commission broadened the Supreme Court's prohibition by forbidding sex-based differences in any employee benefit, even if justified by differences in cost. Actuarial risk classification by sex is prohibited in Montana and Massachusetts by laws requiring unisex insurance for automobile, life, disability, health and in six other states by laws requiring unisex rates for automobile insurance. The Congress and various state legislatures have considered bills expanding the requirement of unisex risk classification, and the issue continues to be litigated. A June 1990 ruling of the European Court of Justice prohibited sex-based differences in pension benefits throughout the twelve-nation European Community.
Economists have analyzed the effects of sex-based risk classification on efficiency and behavior (Crocker and Snow, 1986; Rea, 1987) but generally have not analyzed the discriminatory effects of such practice (see Goldberger, 1984; Cummins et al., 1983; and Aigner and Cain, 1977, for related analyses of sex discrimination in wages or governmental regulation of risk classification in insurance). This article examines the discriminatory effects of sex-based risk classification in the case of deferred pension compensation. Although we do not address the legal basis of the Supreme Court's 1978 and 1983 decisions, we analyze whether the application of the 1964 Civil Rights Act in those decisions alleviates economic discrimination against women (see Lautzenheiser, 1976; King, 1976; Benston, 1982; Burkhauser, 1984; and Connerton, 1983, for discussions relating to the unisex pension decisions).
Although sex-based mortality tables can no longer be used to calculate pension benefits, they are still commonly used by actuaries to value pension liabilities. …