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Assessing the sustainability of pension reforms in Europe

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  • Aaron George Grech

Abstract

Spurred by the ageing transition, many governments have made wide-ranging reforms, dramatically changing Europe's pensions landscape. Nevertheless there remain concerns about future costs, while unease about adequacy is growing. This study develops a comprehensive framework to assess pension system sustainability. It captures the effects of reforms on the ability of systems to alleviate poverty and maintain living standards, while setting out how reforms change future costs and relative entitlements for different generations. This framework differs from others, which just look at generosity at the point of retirement, as it uses pension wealth - the value of all transfers during retirement. This captures the impact of both longevity and changes in the value of pensions during retirement. Moreover, rather than focusing only on average earners with full careers, this framework examines individuals at different wage levels, taking account of actual labour market participation. The countries analysed cover 70% of the EU’s population and include examples of all system types. Our estimates indicate that while reforms have decreased generosity significantly, in most, but not all, countries the poverty alleviation function remains strong, particularly where minimum pensions have improved. However, moves to link benefits to contributions have made some systems less progressive, raising adequacy concerns for women and those on low incomes. The consumption smoothing function of state pensions has declined noticeably, suggesting the need for longer working lives or additional private saving for individuals to maintain pre-reform living standards. Despite the reforms, the size of entitlements of future generations should remain similar to that of current generations, in most cases, as the effect of lower annual benefits should be offset by longer retirement. Though reforms have helped address the financial challenge faced by pension systems, in many countries pressures remain strong and further reforms are likely.

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File URL: http://eprints.lse.ac.uk/43865/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 43865.

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Length: 46 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:ehl:lserod:43865

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  1. Nicholas Barr & Peter Diamond, 2006. "The economics of pensions," LSE Research Online Documents on Economics 2630, London School of Economics and Political Science, LSE Library.
  2. Ondrej Schneider, 2009. "Reforming Pensions in Europe: Economic Fundamentals and Political Factors," CESifo Working Paper Series 2572, CESifo Group Munich.
  3. Eckardt, Martina, 2003. "The Open Method of Co-ordination on Pensions - An Economic Analysis of its Effects on Pension Reforms," Thuenen-Series of Applied Economic Theory 39, University of Rostock, Institute of Economics.
  4. Bottazzi, Renata & Jappelli, Tullio & Padula, Mario, 2006. "Retirement expectations, pension reforms, and their impact on private wealth accumulation," Journal of Public Economics, Elsevier, vol. 90(12), pages 2187-2212, December.
  5. Grech, Aaron George, 2007. "Pension policy in EU25 and its impact on pension benefits," MPRA Paper 33669, University Library of Munich, Germany.
  6. Aaron George Grech, 2012. "Evaluating the possible impact of pension reforms on future living standards in Europe," LSE Research Online Documents on Economics 51296, London School of Economics and Political Science, LSE Library.
  7. 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 6225, London School of Economics and Political Science, LSE Library.
  8. Disney, Richard, 2000. "Crises in Public Pension Programmes in OECD: What Are the Reform Options?," Economic Journal, Royal Economic Society, vol. 110(461), pages F1-23, February.
  9. Barr, Nicholas & Diamond, Peter, 2008. "Reforming Pensions: Principles and Policy Choices," OUP Catalogue, Oxford University Press, number 9780195311303, September.
  10. Whitehouse, Edward, 2007. "Pensions panorama: retirement-income systems in 53 countries," MPRA Paper 14797, University Library of Munich, Germany.
  11. Michael F. Förster & Marco Mira d'Ercole, 2005. "Income Distribution and Poverty in OECD Countries in the Second Half of the 1990s," OECD Social, Employment and Migration Working Papers 22, OECD Publishing.
  12. 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.
  13. Georges Menahem, 2007. "The decommodified security ratio:A tool for assessing European social protection systems," Post-Print halshs-00198398, HAL.
  14. Libor Dušek & Juraj Kopecsni, 2008. "Policy Risk in Action: Pension Reforms and Social Security Wealth in Hungary, Czech Republic, and Slovakia," Working Papers IES 2008/09, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2008.
  15. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
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Cited by:
  1. Giuseppe Marotta, 2011. "Are defined contribution pension schemes socially sustainable? A conceptual map from a macroprudential perspective," Department of Economics 0671, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
  2. Aaron George, Grech, 2014. "Pension policy design: The core issues," MPRA Paper 53662, University Library of Munich, Germany.
  3. Grech, Aaron George, 2013. "How best to measure pension adequacy," MPRA Paper 46126, University Library of Munich, Germany.
  4. Aaron George Grech, 2012. "Evaluating the possible impact of pension reforms on future living standards in Europe," LSE Research Online Documents on Economics 51296, London School of Economics and Political Science, LSE Library.
  5. Lijian Wang & Daniel Béland, 2014. "Assessing the Financial Sustainability of China’s Rural Pension System," Sustainability, MDPI, Open Access Journal, vol. 6(6), pages 3271-3290, May.
  6. Hasan U. Altiok & Glenn Jenkins, 2012. "Social Security Generosity, Budgetary Deficits and Reforms in North Cyprus," Development Discussion Papers 2012-01, JDI Executive Programs.
  7. repec:cep:sticas:case161 is not listed on IDEAS

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