Adequacy of Pension Systems in Europe: An Analysis Based on Comprehensive Replacement Rates

Abstract

Providing access for all individuals to appropriate pension entitlements, public and/or private, which allow them to maintain, to a reasonable degree, their standard of living after retirement is considered a social policy objective.1 An exploration of the above objective can be performed by comparing the individuals’ living standards when active and when retired. The aim of this paper is to develop indicators to highlight the ability of different national pension systems to enable individuals to maintain their living standards at retirement. We will perform the analysis using data – and projections – on different European countries. The proposed indicators will be computed both on actual and projected data. We propose the use of a ‘COmprehensive Replacement’ (CORE) rate. The measurement is conceptually very simple, as it is based on the comparison (or, more precisely, on the ratio) of living standards after retirement with living standards when active. Our aim is to compute, for a set of countries representative of the different European welfare and pension systems, both an actual (data-based) version of CORE, based on ECHP data, and to project its evolution into the future. To this end we will use the semi-aggregate simulation model CeRPSAM (Ferraresi & Monticone, 2008). The paper is organised as follows. Section 1 provides a theoretical framework as well as a review of the literature on the topic. Section 2 contains the computation of replacement rates based on ECHP data. In Section 3 we use the CeRPSAM projections to compute COREs over time. Section 4 concludes.