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Measurements of Adequacy and Sustainability.

Mechanisms of redistribution and financing against poverty

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Adequacy:

“As long as no reliable prospective income indicators exist, which allow one to one to evaluate the effect of more structural changes on future benefits, the rather short term policy-making process may favour the principal of financial sustainability.”

Eckart 2005

Budapest 20/09/2013, Marianna Papamichail

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Sustainability:

Financial sustainability after crisis has proclaimed as the major issue in the European Union. Unfortunately citizens and politicians were unwilling to deal with the matter before head contributing to inflating its final austerity impact.


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Measurements of Adequacy Pros and Cons


Advantages Disadvantages GreeceTheoretical Replacement Ratio,TRR

Numerous cases can be examined e.g. wage profile, career profile, age profile

cases are data sensitive, lack of dataisolated casesstatic

Benefit Ratio, BR global indice too compactserves also as sustainability measurement

General Average Replacement Ratio, GARR

global indicepoverty issues not captured

35%**

Net Pension Wealth/Net Pension Wealth Requirement to remain out of risk of poverty (1)

poverty issues well captured case sensitive

sustainability issues can be examined

fully comparable between countries

not representative, e.g. Greece

100%*

40%**

72%***


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(1) Net pension wealth

Net Pension Wealth =

Net Pension Wealth requirement to remain out of the risk of poverty =

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o The net pension wealth is measured at age a values

a : active’s current age

h : retirement age

W : termination age of life table

Bs(h) : pension expected at age (s) attributed for the first time at

age h

Povs(h) : amount of poverty threshold expected at ages (s)

i.e. after retirement

: probability of an individual aged a to survive until the age s


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o Assumptions for the calculation of the net pension wealth: Average age of active in 2010 = 36 Average retirement age in 2040 = 66 Termination age of life table =100 Net pension = 90% of gross pension Density = 80%

Bs(h) is indexed by the pension indexation while Povs(h) is indexed by the wage indexation. So in 2040, when the individual retires, the ratio of initial pension to poverty threshold is 94% while the final ratio over the long run capturing all pensionable life of pension wealth drops to 72%


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Observed inequalities between Genders: Males and femalesGenerations: Individuals

employed before 1993 and after 1992

Ages: People of different ages

Income Inequality between employees in 2010


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For any particular group the gap between the poorer and the wealthier of each group is defined here as the ratio of the wage of earners belonging to the 10% highest percentile to that of the lowest 10% percentile. The bigger the inequality gap between the poorer and the wealthier employees the more significant the adequacy issue between future pensioners.

Income Inequality between employees in 2010


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Figures from examined groups: 1. Men pre 1993, wage gap =9

0

5000

10000

15000

20000

25000

15-25

26-35

36-45

46-55

56-65

66-76

Gross salary distribution Males Pre 1993 Gross salary distribution Males Pre 1993 Gross salary distribution Males Pre 1993

Average salary = 16.000,00 euros


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Figures from examined groups: 2. Women pre 1993, wage gap = 7,8

0

2000

4000

6000

8000

10000

12000

15-25 26-35

36-45 46-55

56-65 66-76

Gross salary distribution Females Pre 1993

16.000,00 euros


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Figures from examined groups: 3. Men post 1992, wage gap = 10

0

5000

10000

15000

20000

25000

15-25 26-35

36-45 46-55

56-65 66-76

Males Post 1992Gross salary distribution Males Post 1992

13.300,00 euros


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Figures from examined groups: 4. Women post 1992, wage gap = 8

0

5000

10000

15000

20000

25000

30000

35000

15-25 26-35

36-45 46-55

56-65 66-76

Gross salary distribution Females Post 1992

13.300,00 euros


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Poverty threshold in 2010 = = 60% of Median Income = 6.591 Euros

Median Income is 10.985 Euros

Poor income earners: of income* below 6.591 Euros

Medium income earners: of income between 6.591 and

10.985 Euros (median income)

High income earners: of income higher than 10.985 Euros

Measuring poverty between employees and pensioners


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Poverty between employees in 2010

males pre females pre males post females post

Active population at risk of poverty percentages

5 % 12 % 31 % 38 %

Average gross annual wage of poor employees

3.600,00 € 3.700,00 € 3.315,00 € 3.460,00 €


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Poverty between pensioners in 2040

males pre females pre males post females post

Pensioners’ population at risk of poverty percentages

42 % 40 % 67 % 87 %

Average gross annual pension of poor pensioners in 2010 prices

5.960,00 € 5.902,00 € 5.869,00 € 5.887,00 €


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Mandatory measure also adequacy in in sustainability studies by using common indicators

Develop representative replacement ratios weighed according to groups of people included

Explore possibilities to tackle poverty and quantify amounts required

Explore the potential use of redistribution mechanisms from high to low come earners

How to overcome constraints in measuring

adequacy along with sustainability


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Example: The exercise Establish three (or more) wage bands

reflecting actual poverty thresholds (indigence etc.) as follows

Low: Below poverty threshold

Medium: Of median income

High: Over median income


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Two pension old age expenditure results in 2040 are compared

1. Without any change, A

2. By shifting poor pensions to poverty line, B

Quantified additional amount required for poverty alleviation in 2040 is the difference of the pension expenditures: D = B-A

Propose an automatic adequacy redistribution from the higher to the lower pension/ income bands according to the replacement ratio. The upper limit could be established at 60% (15 pp more than the suggested RR according to ILO’s act)

Methodological approach


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A = 4.614

B = 5.113

D = 499 , so B is 10.81% higher than A

Amount D should be insured either by state budget, or from new sources or as a combination of state’s and medium and high income pensioners contribution. After social dialogue a formula of automatic adequacy redistribution mechanism from the higher to the lower pension/ income bands could be explored. The minimum replacement rate for all wage bands could be established at 60% (15 pp higher than the RR suggested according to ILO’s act)

2040 old age pension expenditure in 2010 prices

(millions of Euros)


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Comparison of pensioners'

income zones 2010-2040

Number of pensioners

Amount of icome zone benefits in

millions Euros

Average icome zone benefit

Income zone population percentage

Ratio of income zone benefits to

total

2010 1.363 8,58 € 6.296,08 € 0,34% 0,27%2040 341.043 2.012,91 € 5.902,23 € 55,20% 43,62%

2010 12.497 94,10 € 7.529,61 € 3,10% 2,96%2040 210.792 1.875,61 € 8.044,15 € 34,12% 40,65%

2010 389.841 3.071,42 € 7.878,67 € 96,57% 96,77%2040 66.045 725,62 € 10.986,73 € 10,69% 15,73%

POOR, up to 6.591,00 Euros (poverty line)

MEDIUM, from 6.592,00 Euros to 10.985,00 Euros

HIGH, from 10.986,00 Euros and over

prices are in 2010 values

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Sustainability or adequacy?ADQ more reliable

measurements should start

being developed

SUSTAINABILITY should focus on income

and on adequacy

sustainadequacy



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References: How best to measure pension adequacy Aaron George Grech, April 2013

The 2012 Ageing Report, European Commission 2/2012

Pension Adequacy in the European Union 2010-2050

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Thank you


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