WP 9 – Maintaining Living Standards After Retirement

Elsa Fornero (University of Turin and CeRP)

Margherita Borella (University of Turin and CeRP)

Róbert I. Gál (Tarki)

Tamás Keller (Tarki)

Ján Košta (Slovak Academy of Sciences)

Katarzyna Piętka (CASE)

Bruxelles, 20 October 2008

Social Policy Objective

“Provide access for all individuals to

appropriate pension arrangements, public

and/or private, which allow them to earn

pension entitlements enabling them to

maintain, to a reasonable degree, their

living standard after retirement”

Plan of the Talk

• Theoretical framework

• Definition of indicators

• Data-based analysis

• Projection analysis

Theoretical Framework

• Life cycle model: in its simplest form, it

predicts individuals smooth their consumption

patterns. If retirement is anticipated (e.g. no

health shocks) consumption should be

smoothed at the time of retirement.

• Empirical evidence shows consumption is

actually reduced at the time of retirement.

A COmprehensive REplacement rate (CORE)

1) Compare individuals’ living standards

when active and when retired

2) Approximate living standards with

disposable income

Replacement rates: a taxonomy

• Theoretical, empirical or simulated replacement rates

• Time Horizon: actual or prospective

• Cross- sectional or longitudinal

• Individual vs average replacement rates

• Individual vs family

• Income measure: pension income vs disposable income

• Net vs gross replacement rates

A cross-country analysis based on CORE

1) Actual CORE: cross-country analysis based on ECHP

data (I, DK, F, DE, UK, LUX, NL, ES) country-specific analysis for PL, SK, HU

2) Projected CORE: all countries + LV

1) Use ECHP data to study various issues: “standard” vs comprehensive replacement rates; individual vs family based rates…

2) Disposable income: pension income from public and private schemes, income from work, unemployment, disability, survivor, housing,and other social benefits.

3) Sample: 1996-2000 (wave 3-8)

Actual CORE: cross-country

1) Median individual RR vs median individual CORE: CORE is higher than RR in all countries (range 4-17 pp)

2) Gender differences: attenuated when computing CORE (wrt RR)

3) Family disposable income: higher median CORE in all countries.

Main results

Projected CORE

• Use CeRPSAM projections (2005-2050)

• Countries: I, DK, F, DE, UK, LUX, NL, ES, PL, SK, HU, LV

• Different definition of CORE:- no individual data- compare disposable income by age class: 65-69 vs 55-59

• Longitudinal or cross-sectional

Where:- N : size of the considered cell- p : an age class in which most individuals

are retired - a : an age class in which most individuals

are active in the labour market - k : =0 or =p-a

kta

kkta

tp

tpkt

t NgINCDISP

NINCDISPCORE

/)1(_

/_

Fig. 1a – Longitudinal CORE. Age classes: 65-69 / 55-59

Longitudinal CORE

0

20

40

60

80

100

2015 2020 2025 2030 2035 2040 2045 2050

FR

IT

ES

DE

Fig. 2a – Longitudinal CORE based on first pillar only. Age classes: 65-69 / 55-59

Longitudinal CORE

0

20

40

60

80

100

2015 2020 2025 2030 2035 2040 2045 2050

FR

IT

ES

DE

Fig. 1b – Longitudinal CORE. Age classes: 65-69 / 55-59

Longitudinal CORE

0

20

40

60

80

100

2015 2020 2025 2030 2035 2040 2045 2050

LU

DK

NL

UK

Fig. 2b – Longitudinal CORE based on first pillar only. Age classes: 65-69 / 55-59

Longitudinal CORE

0

20

40

60

80

100

2015 2020 2025 2030 2035 2040 2045 2050

LU

DK

NL

UK

Fig. 1c – Longitudinal CORE. Age classes: 65-69 / 55-59

Longitudinal CORE

0

20

40

60

80

100

2015 2020 2025 2030 2035 2040 2045 2050

PL

LV

SK

HU

Fig. 2c – Longitudinal CORE based on first pillar only. Age classes: 65-69 / 55-59

Longitudinal CORE

0

20

40

60

80

100

2015 2020 2025 2030 2035 2040 2045 2050

PL

LV

SK

HU

Projected longitudinal CORE

2015 2050 2015 20501st pillar only 1st pillar only

FRANCE 64.8 48.6 64.8 48.6

ITALY 82.1 84.9 81 75.2

SPAIN 86 86 86 86

GERMANY 73.4 66.1 71.8 51.7

UNITED KINGDOM 70.8 69.3 34.4 33.9

LUXEMBURG 72.1 77.5 72.1 77.5

DENMARK 67.6 69.2 62.3 52.7

NETHERLANDS 88.2 88.7 42.9 41.7

POLAND 89.8 52.9 89.8 52.9

LATVIA 49.7 59.7 49.7 59.7

HUNGARY 68.5 76 67.2 64.1

SLOVAKIA 65.5 58.5 65.5 58.5

Summary

• CORE high and stable in IT, ES, NL (around 85%).

• Lower but stable: UK, LU, DK, HU

• Increasing in LT (by 10pp)

• Decreasing in FR, DE, PL, SK to low values (65% for DE, 60% PL and SK)

Final remarks

• Importance of theoretical RRs and participation/employment projections in driving the results

• We find a group of countries with decreasing projected CORE (DE; LT,FR, SK, PL)