How best to measure pension adequacy
AbstractThough the main benchmark used to assess pension reforms continues to be the expected resulting fall in future government spending, the impact of policy changes on pension adequacy is increasingly coming to the fore. As yet, there does not seem to be a broad consensus in policymaking circles and academic literature on what constitutes the best measure of pension adequacy. While various indicators have been developed and utilised, no single measure appears to offer a clear indication of the extent to which reforms will impact on the achievement of pension system goals. Many indicators appear ill-suited to study the effective impact of reforms, particularly those that change the nature of the pension system from defined benefit to defined contribution. Existing measures are frequently hard to interpret as they do not have an underlying benchmark which allows their current or projected value to be assessed as adequate or inadequate. Currently used pension adequacy indicators tend to be point-in-time measures which ignore the impact of benefit indexation rules. They also are unaffected by very important factors, such as changes in the pension age and in life expectancy. This tends to make existing indicators minimise the impact of systemic reforms on the poverty alleviation and income replacement functions of pension systems. The emphasis on assumptions which are very unrepresentative of real-life labour market conditions also makes current indicators deceptive, particularly in relation to outcomes for women and those on low incomes. This paper posits that these defects can be remedied by using adequacy indicators based on estimates of pension wealth (i.e. the total projected flow of pension benefits through retirement) calculated using more realistic labour market assumptions. These measures are used to give a better indication of the effective impact of pension reforms enacted since the 1990s in ten major European countries. They suggest that these reforms have decreased generosity significantly, but that the poverty alleviation function remains strong in those countries where minimum pensions were improved. However, moves to link benefits to contributions have raised clear adequacy concerns for women and for those on low incomes which policymakers should consider and tackle.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 46126.
Date of creation: Apr 2013
Date of revision:
Social Security and Public Pensions; Retirement; Poverty; Retirement Policies;
Other versions of this item:
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
- I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
- J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
This paper has been announced in the following NEP Reports:
- NEP-AGE-2013-04-20 (Economics of Ageing)
- NEP-ALL-2013-04-20 (All new papers)
- NEP-DEM-2013-04-20 (Demographic Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- 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.
- 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.
- Alain Jousten, 2007. "Public Pension Reform: A Primer," IMF Working Papers 07/28, International Monetary Fund.
- Ondřej Schneider, 2009.
"Reforming Pensions in Europe: Economic Fundamentals and Political Factors,"
Working Papers IES
2009/08, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2009.
- 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.
- Ondrej Schneider, 2009. "Reforming Pensions in Europe: Economic Fundamentals and Political Factors," CESifo Working Paper Series 2572, CESifo Group Munich.
- Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, vol. 26(3), pages 303-326, April.
- Nicholas Barr & Peter Diamond, 2006. "The Economics of Pensions," Oxford Review of Economic Policy, Oxford University Press, vol. 22(1), pages 15-39, Spring.
- Modigliani,Franco & Muralidhar,Arun, 2005.
"Rethinking Pension Reform,"
Cambridge University Press, number 9780521676533, November.
- Grech, Aaron George, 2012.
"Evaluating the possible impact of pension reforms on future living standards in Europe,"
39851, University Library of Munich, Germany.
- Aaron George Grech, 2012. "Evaluating the possible impact of pension reforms on future living standards in Europe," CASE Papers /161, Centre for Analysis of Social Exclusion, LSE.
- 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.
- Grech, Aaron George, 2007. "Pension policy in EU25 and its impact on pension benefits," MPRA Paper 33669, University Library of Munich, Germany.
- Grech, Aaron George, 2010.
"Assessing the sustainability of pension reforms in Europe,"
27407, University Library of Munich, Germany.
- Aaron George Grech, 2010. "Assessing the sustainability of pension reforms in Europe," CASE Papers case140, Centre for Analysis of Social Exclusion, LSE.
- Grech, Aaron George, 2013. "Assessing the sustainability of pension reforms in Europe," MPRA Paper 51474, University Library of Munich, Germany.
- Robert Holzmann & Richard Hinz, 2005. "Old Age Income Support in the 21st century: An International Perspective on Pension Systems and Reform," World Bank Publications, The World Bank, number 7336, January.
- Palacios, Robert & Sluchynsky, Oleksiy, 2006. "Social pensions Part I : their role in the overall pension system," Social Protection Discussion Papers 36237, The World Bank.
- Carl Emmerson & Howard Reed & Andrew Shephard, 2004. "An assessment of PenSim2," IFS Working Papers W04/21, Institute for Fiscal Studies.
- Olivia S. Mitchell & John W.R. Phillips, 2006. "Social Security Replacement Rates for Alternative Earnings Benchmarks," Working Papers wp116, University of Michigan, Michigan Retirement Research Center.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.