WP 9 – Maintaining Living Standards After Retirement Elsa Fornero (University of Turin and CeRP) Margherita Borella (University of Turin and CeRP) Róbert I. Gál (Tarki) Tamás Keller (Tarki) Ján Košta (Slovak Academy of Sciences) Katarzyna Piętka (CASE) Bruxelles, 20 October 2008

Social Policy Objective “Provide access for all individuals to appropriate pension arrangements, public and/or private, which allow them to earn pension entitlements enabling them to maintain, to a reasonable degree, their living standard after retirement”

Plan of the Talk Theoretical framework Definition of indicators Data-based analysis Projection analysis

Theoretical Framework Life cycle model: in its simplest form, it predicts individuals smooth their consumption patterns. If retirement is anticipated (e.g. no health shocks) consumption should be smoothed at the time of retirement. Empirical evidence shows consumption is actually reduced at the time of retirement.

A COmprehensive REplacement rate (CORE) 1)Compare individuals’ living standards when active and when retired 2)Approximate living standards with disposable income

Replacement rates: a taxonomy Theoretical, empirical or simulated replacement rates Time Horizon: actual or prospective Cross- sectional or longitudinal Individual vs average replacement rates Individual vs family Income measure: pension income vs disposable income Net vs gross replacement rates

A cross-country analysis based on CORE 1)Actual CORE:  cross-country analysis based on ECHP data (I, DK, F, DE, UK, LUX, NL, ES)  country-specific analysis for PL, SK, HU 2)Projected CORE: all countries + LV

1)Use ECHP data to study various issues: “standard” vs comprehensive replacement rates; individual vs family based rates… 2)Disposable income: pension income from public and private schemes, income from work, unemployment, disability, survivor, housing,and other social benefits. 3)Sample: (wave 3-8) Actual CORE: cross-country

1)Median individual RR vs median individual CORE: CORE is higher than RR in all countries (range 4-17 pp) 2)Gender differences: attenuated when computing CORE (wrt RR) 3)Family disposable income: higher median CORE in all countries. Main results

Projected CORE Use CeRPSAM projections ( ) Countries: I, DK, F, DE, UK, LUX, NL, ES, PL, SK, HU, LV Different definition of CORE: - no individual data - compare disposable income by age class: vs Longitudinal or cross-sectional

Where: -N : size of the considered cell -p : an age class in which most individuals are retired -a : an age class in which most individuals are active in the labour market -k : =0 or =p-a

Summary CORE high and stable in IT, ES, NL (around 85%). Lower but stable: UK, LU, DK, HU Increasing in LT (by 10pp) Decreasing in FR, DE, PL, SK to low values (65% for DE, 60% PL and SK)

Final remarks Importance of theoretical RRs and participation/employment projections in driving the results We find a group of countries with decreasing projected CORE (DE; LT,FR, SK, PL)