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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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File URL: http://eprints.lse.ac.uk/51296/
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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 51296.

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Length: 23 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:ehl:lserod:51296

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Related research

Keywords: social security; public pensions; retirement; poverty; retirement Policies;

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References

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  1. Grech, Aaron George, 2013. "Assessing the sustainability of pension reforms in Europe," MPRA Paper 51474, University Library of Munich, Germany.
  2. Flood, Lennart & Klevmarken, N. Anders & Mitrut, Andreea, 2006. "The Income of the Swedish Baby Boomers," IZA Discussion Papers 2354, Institute for the Study of Labor (IZA).
  3. 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, vol. 69(274), pages 229-43, May.
  4. Ondøej Schneider, 2009. "Reforming Pensions in Europe: Economic Fundamentals and Political Factors," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(4), pages 292-308, Oktober.
  5. 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, vol. 58(07-08), pages 329-357, Oktober.
  6. Bottazzi, Renata & Jappelli, Tullio & Padula, Mario, 2006. "Retirement expectations, pension reforms, and their impact on private wealth accumulation," CFS Working Paper Series 2006/10, Center for Financial Studies (CFS).
  7. Laurence Kotlikoff & Ben Marx & Pietro Rizza, 2006. "Americans' Dependency on Social Security," Working Papers wp126, University of Michigan, Michigan Retirement Research Center.
  8. Gábor Orbán & Dániel Palotai, 2005. "The sustainability of the Hungarian pension system: a reassessment," MNB Occasional Papers 2005/40, Magyar Nemzeti Bank (the central bank of Hungary).
  9. 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.
  10. Raquel Fonseca & Thepthida Sopraseuth, 2006. "Welfare Effects of Social Security Reforms Across Europe: The Case of France and Italy," Working Papers 437, RAND Corporation Publications Department.
  11. Michael Fuchs & Aaron George Grech & Asghar Zaidi, 2006. "Pension Policy in EU25 and its Possible Impact on Elderly Poverty," CASE Papers case116, Centre for Analysis of Social Exclusion, LSE.
  12. 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.
  13. 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.
  14. Daniel Leigh & David Hauner & Michael Skaarup, 2007. "Ensuring Fiscal Sustainability in G-7 Countries," IMF Working Papers 07/187, International Monetary Fund.
  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. Aaron George Grech, 2010. "Assessing the sustainability of pension reforms in Europe," LSE Research Online Documents on Economics 43865, London School of Economics and Political Science, LSE Library.
  2. Aaron George Grech, 2013. "How best to measure pension adequacy," LSE Research Online Documents on Economics 51270, London School of Economics and Political Science, LSE Library.
  3. Aaron George, Grech, 2014. "Pension policy design: The core issues," MPRA Paper 53662, University Library of Munich, Germany.

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