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Evaluating the possible impact of pension reforms on future living standards in Europe

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  • Aaron George Grech

Abstract

Successive reforms enacted since the 1990s have dramatically changed Europe's pensions landscape. This paper tries to assess the impact of recent reforms on the ability of systems to alleviate poverty and maintain living standards, using estimates of pension wealth for a number of hypothetical cases. By focusing on all prospective pension transfers rather than just those at the point of retirement, this approach can provide additional insights on the efficacy of pension systems in the light of increasing longevity. Our estimates indicate that while reforms have decreased generosity significantly, in most countries poverty alleviation remains strong. However, moves to link benefits to contributions have made some systems less progressive, raising adequacy concerns for certain groups. In particular, unless the labour market outcomes of women and of lower-income individuals change substantially over the coming decades, state pension transfers will prove inadequate, particularly in Eastern European countries. Similarly while the generosity of minimum pensions appears to have either been safeguarded by pension reforms, or improved in some cases, these transfers generally remain inadequate to maintain individuals above the 60% relative poverty threshold throughout retirement. Our simulations suggest that the gradual negative impact of price indexation on the relative adequacy of state pensions is becoming even more substantial in view of the lengthening of the time spent in receipt of retirement benefits. The consumption smoothing function of state pensions has declined noticeably, strengthening the need for longer careers and additional private saving. When pressed, policymakers, particularly in Western Europe, seem to have been more willing to sacrifice the income smoothing function of pensions rather than its poverty alleviation function. Policymakers in some counties, notably Germany, France and the UK, have sought to refocus state pension systems towards generating better outcomes for people in the bottom half of the income distribution, probably with the insight that middle- to high-income individuals are possibly in a better position to accommodate the effect of state pension reforms by increasing their private saving. However in some cases, notably in Eastern Europe, results suggest that policymakers may not have fully considered the full impact of their policies on those on low incomes, on those with incomplete careers and on women.

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Bibliographic Info

Paper provided by Centre for Analysis of Social Exclusion, LSE in its series CASE Papers with number /161.

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Date of creation: May 2012
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Handle: RePEc:cep:sticas:/161

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Web page: http://sticerd.lse.ac.uk/case/_new/publications/default.asp

Related research

Keywords: Social Security; Public Pensions; Retirement; Poverty; Retirement Policies;

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References

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  1. John P. Martin & Edward R. Whitehouse, 2008. "Reforming Retirement-Income Systems: Lessons from the Recent Experiences of OECD Countries," OECD Social, Employment and Migration Working Papers 66, OECD Publishing.
  2. Ondrej Schneider, 2009. "Reforming Pensions in Europe: Economic Fundamentals and Political Factors," CESifo Working Paper Series 2572, CESifo Group Munich.
  3. Bottazzi, Renata & Jappelli, Tullio & Padula, Mario, 2006. "Retirement expectations, pension reforms, and their impact on private wealth accumulation," Journal of Public Economics, Elsevier, Elsevier, vol. 90(12), pages 2187-2212, December.
  4. Laurence Kotlikoff & Ben Marx & Pietro Rizza, 2006. "Americans' Dependency on Social Security," Working Papers, University of Michigan, Michigan Retirement Research Center wp126, University of Michigan, Michigan Retirement Research Center.
  5. Aaron George Grech, 2010. "Assessing the sustainability of pension reforms in Europe," CASE Papers, Centre for Analysis of Social Exclusion, LSE case140, Centre for Analysis of Social Exclusion, LSE.
  6. Flood, Lennart & Klevmarken, Anders & Mitrut, Andreea, 2006. "The income of the Swedish baby boomers," Working Papers in Economics 209, University of Gothenburg, Department of Economics.
  7. Disney, Richard, 2000. "Crises in Public Pension Programmes in OECD: What Are the Reform Options?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(461), pages F1-23, February.
  8. Daniel Leigh & David Hauner & Michael Skaarup, 2007. "Ensuring Fiscal Sustainability in G-7 Countries," IMF Working Papers 07/187, International Monetary Fund.
  9. Raquel Fonseca & Thepthida Sopraseuth, 2005. "Welfare Effects of Social Security Reforms Across Europe : the Case of France and Italy," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 138, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  10. Asghar Zaidi & Aaron George Grech & Michael Fuchs, 2006. "Pension policy in EU25 and its possible impact on elderly poverty," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 6225, London School of Economics and Political Science, LSE Library.
  11. Libor Dušek & Juraj Kopecsni, 2008. "Policy Risk in Action: Pension Reforms and Social Security Wealth in Hungary, Czech Republic, and Slovakia," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 58(07-08), pages 329-357, Oktober.
  12. van de Coevering, Clement & Foster, Daniel & Haunit, Paula & Kennedy, Cathal & Meagher, Sarah & Van den Berg, Jennie, 2006. "Estimating economic and social welfare impacts of pension reform," MPRA Paper 1623, University Library of Munich, Germany.
  13. Atkinson, Tony, et al, 2002. "Microsimulation of Social Policy in the European Union: Case Study of a European Minimum Pension," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 69(274), pages 229-43, May.
  14. Gábor Orbán & Dániel Palotai, 2005. "The sustainability of the Hungarian pension system: a reassessment," MNB Occasional Papers, Magyar Nemzeti Bank (the central bank of Hungary) 2005/40, Magyar Nemzeti Bank (the central bank of Hungary).
  15. Grech, Aaron George, 2007. "Pension policy in EU25 and its impact on pension benefits," MPRA Paper 33669, University Library of Munich, Germany.
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Cited by:
  1. Grech, Aaron George, 2014. "Assessing the sustainability of pension reforms in Europe: a pension wealth approach," MPRA Paper 57638, University Library of Munich, Germany.
  2. Grech, Aaron George, 2013. "How best to measure pension adequacy," MPRA Paper 46126, University Library of Munich, Germany.
  3. Aaron George Grech, 2010. "Assessing the sustainability of pension reforms in Europe," CASE Papers, Centre for Analysis of Social Exclusion, LSE case140, Centre for Analysis of Social Exclusion, LSE.
  4. Aaron George, Grech, 2014. "Pension policy design: The core issues," MPRA Paper 53662, University Library of Munich, Germany.

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