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Assessing the sustainability of pension reforms in Europe

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  • Grech, Aaron George

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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  • Grech, Aaron George, 2010. "Assessing the sustainability of pension reforms in Europe," MPRA Paper 27407, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:27407
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    References listed on IDEAS

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    1. Nicholas Barr & Peter Diamond, 2006. "The Economics of Pensions," Oxford Review of Economic Policy, Oxford University Press, vol. 22(1), pages 15-39, Spring.
    2. 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.
    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. Grech, Aaron George, 2007. "Pension policy in EU25 and its impact on pension benefits," MPRA Paper 33669, University Library of Munich, Germany.
    5. Disney, Richard, 2000. "Crises in Public Pension Programmes in OECD: What Are the Reform Options?," Economic Journal, Royal Economic Society, vol. 110(461), pages 1-23, February.
    6. Modigliani,Franco & Muralidhar,Arun, 2005. "Rethinking Pension Reform," Cambridge Books, Cambridge University Press, number 9780521676533, October.
    7. 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.
    8. Edward Whitehouse, 2007. "Pensions Panorama : Retirement-Income Systems in 53 Countries," World Bank Publications, The World Bank, number 7177.
    9. Zaidi, Asghar & Grech, Aaron George & Fuchs, Michael, 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.
    10. Grech, Aaron George, 2012. "Evaluating the possible impact of pension reforms onfuture living standards in Europe," LSE Research Online Documents on Economics 51296, London School of Economics and Political Science, LSE Library.
    11. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-926, Sept./Oct.
    12. 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.
    13. Georges Menahem, 2007. "The decommodified security ratio:A tool for assessing European social protection systems," Post-Print halshs-00198398, HAL.
    14. Michael 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.
    15. Martin, John P. & Whitehouse, Edward, 2008. "Reforming Retirement-Income Systems: Lessons from the Recent Experiences of OECD Countries," IZA Discussion Papers 3521, Institute for the Study of Labor (IZA).
    16. Barr, Nicholas & Diamond, Peter, 2008. "Reforming Pensions: Principles and Policy Choices," OUP Catalogue, Oxford University Press, number 9780195311303.
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    Citations

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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, 2013. "How best to measure pension adequacy," CASE Papers case172, Centre for Analysis of Social Exclusion, LSE.
    3. Grech, Aaron George, 2012. "Evaluating the possible impact of pension reforms onfuture living standards in Europe," LSE Research Online Documents on Economics 51296, London School of Economics and Political Science, LSE Library.
    4. Grech, Aaron George, 2014. "Evaluating the possible impact of pension reforms on elderly poverty in Europe," MPRA Paper 57639, University Library of Munich, Germany.
    5. R. Melis & A. Trudda, 2014. "Mixed pension systems sustainability," Working Paper CRENoS 201413, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    6. Lijian Wang & Daniel Béland, 2014. "Assessing the Financial Sustainability of China’s Rural Pension System," Sustainability, MDPI, Open Access Journal, vol. 6(6), pages 1-20, May.
    7. Yuehong Tian & Xianglian Zhao, 2016. "Stochastic Forecast of the Financial Sustainability of Basic Pension in China," Sustainability, MDPI, Open Access Journal, vol. 8(1), pages 1-17, January.
    8. Hasan U. Altiok & Glenn P. Jenkins, 2013. "Social security generosity, budgetary deficits and reforms in North Cyprus," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 16(2), pages 218-235, June.
    9. Grech, Aaron George, 2014. "Assessing the sustainability of pension reforms in Europe: a pension wealth approach," MPRA Paper 57638, University Library of Munich, Germany.
    10. repec:sph:rjedep:v:2:y:2017:i:6:p:14-23 is not listed on IDEAS
    11. Dilshodjon Alidjonovich Rakhmonov, 2016. "Improvement of the Pension System in Uzbekistan: Through the Experience of the European Union Countries," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 4(1), pages 80-90.
    12. 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".
    13. Aaron George, Grech, 2014. "Pension policy design: The core issues," MPRA Paper 53662, University Library of Munich, Germany.
    14. repec:cep:sticas:/161 is not listed on IDEAS
    15. Grech, Aaron George, 2015. "Pension reforms in the 1990s and during the financial crisis: More of the same?," MPRA Paper 66894, University Library of Munich, Germany.
    16. repec:cep:sticas:/172 is not listed on IDEAS

    More about this item

    Keywords

    Social Security and Public Pensions; Retirement; Poverty; Retirement Policies;

    JEL classification:

    • 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

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