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Evaluating the possible impact of pension reforms onfuture living standards in Europe

Grech, Aaron George (2012) Evaluating the possible impact of pension reforms onfuture living standards in Europe. CASEpapers (161). Centre for the Analysis of Social Exclusion, London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Report)
Official URL: http://sticerd.lse.ac.uk/case
Additional Information: © 2012 The Author
Divisions: Centre for Analysis of Social Exclusion
Subjects: H Social Sciences > HJ Public Finance
H Social Sciences > HN Social history and conditions. Social problems. Social reform
JEL classification: H - Public Economics > H5 - National Government Expenditures and Related Policies > H55 - Social Security and Public Pensions
I - Health, Education, and Welfare > I3 - Welfare and Poverty > I38 - Government Policy; Provision and Effects of Welfare Programs
J - Labor and Demographic Economics > J2 - Time Allocation, Work Behavior, and Employment Determination and Creation; Human Capital; Retirement > J26 - Retirement; Retirement Policies
Sets: Research centres and groups > Centre for Analysis of Social Exclusion (CASE)
Date Deposited: 01 Aug 2013 12:04
Last Modified: 20 Feb 2019 01:56
URI: http://eprints.lse.ac.uk/id/eprint/51296

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