Evaluating the possible impact of pension reforms on future living standards in Europe
Spurred by the ageing transition, many governments have carried out wide-ranging reforms, changing the state pensions landscape in Europe dramatically since the early 1990s. Most reforms appear to have been driven mainly by a desire to reduce projected levels of future spending on state pensions.
There is a growing body of evidence which suggests that these reforms may have significant adverse implications on future state pension adequacy, particularly as they hit disproportionately entitlements of those population groups less able to accommodate the effects of benefit cuts. However, the indicators used to capture these impacts tend to focus specifically on the generosity of state pension benefits at the point of retirement rather than on the overall state pension transfers which future generations will benefit from. While in most cases reforms have cut annual pension benefits, increased longevity could mean unchanged total transfers over retirement.1 On the other hand, increased longevity can impact on pension adequacy if state pension benefits lose some of their relative value over time, on account of not being increased in line with growth in average earnings.
This paper will try to address these issues, presenting evidence on the impact of pension reforms on overall state pension transfers in ten European countries.2 In doing so, it will also point out the importance of not focusing solely on pension generosity for those with full careers and for those on average earnings, as the effect of reforms on full career entitlements tend to be weaker than the impact on those with incomplete careers. The approach taken in this paper follows an analytical framework set forth in an earlier paper, Grech (2010). However it adds much more detail, by focusing more thoroughly on the distributional impacts of pension reforms and presenting results for a number of hypothetical individuals, rather than focusing on aggregate impacts.
The paper has four sections. The first reviews a number of studies which have sought to evaluate the impact of reforms on pension adequacy. It then develops an alternative set of indicators, based on the concept of pension wealth – the value of all prospective pension transfers received during retirement – looking at a number of hypothetical individuals with incomplete careers and on different levels of income. The third section applies this framework to reforms legislated in ten European countries between the early 1990s and 2009, while section 4 concludes.