Article [ Article 2009030205 - 02/03/2009]

Assessing adequacy of pensions

Europe faces large demographic changes in the coming decades, changes that will have economic and budgetary consequences. The Economic Policy Committee (EPC) established the Ageing Working Group (AWG), one of whose tasks is to assess the long-term sustainability of public finances. It does so by presenting a set of public expenditure projections for all Member States, including for pensions. The sustainability and adequacy of pensions, however, are two sides of the same coin, and this project aims to assess the consequences of the AWG projections and assumptions on the adequacy of pensions. For this reason, the dynamic microsimulation model, MIDAS, has been developed for Belgium, Germany and Italy. MIDAS starts from a cross-sectional dataset representing a population of all ages at a certain point in time; in the Belgian case, the PSBH dataset for Belgium in 2002. The life spans of individuals in the dataset are then simulated up to 2050, together with their interactions.

The Belgian version of MIDAS simulates first-pillar old-age pension benefits for private sector employees, civil servants, and the self-employed. Furthermore, it simulates the Conventional Early Retirements (CELS) benefit, the disability pension benefit for private sector employees, and - finally - the widow(er)s' pension benefit, again for private sector employees, civil servants, and also the self-employed.

The model produces all kinds of prospective indicators of pension adequacy in Belgium, Germany and Italy. The report presents the individual replacement rate, and various indicators of poverty, inequality and redistribution that are based on equivalent household income.

In Belgium, the replacement rate of men and women entering retirement should decrease until about 2040. After that, a limited recovery will set in. This development is explained by the decreasing importance of household pensions relative to individual pensions, the link between wages and pensions, and the development of the wage ceiling. The replacement rate for women is higher than that for men, but they converge throughout the simulation period.

In general, the inequality of retirement benefits is expected to be considerably lower than that of earnings. Furthermore, the simulation results suggest that this redistribution
will increase after 2020. This is a long-term consequence of the reinforced linkage between wages and benefits in the simulation period, compared to the situation before 2002.

Those individuals that live in households with only retirement benefits generally have a higher risk of and intensity of poverty. The development of poverty risks and intensities will increase between 2002 and roughly 2010, and decrease again during the 2030s. It should finally increase again during the 2040s. This evolution is mainly explained by the evolution of household structure, combined with the evolution of the composition of household earnings.

An international comparison of the simulation results suggests that the impact of parametric reforms in Belgium and Germany and the systemic reform in Italy on (re)distribution and poverty should go into the same direction, but that the magnitudes will differ. Indeed, this impact is expected to be stronger in Italy than in Belgium and Germany.