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Updates of current and prospective theoretical pension replacement rates 2006-2046

10/07/2009 Updates of current and prospective theoretical pension replacement rates 2006-2046

The Indicator Sub-Group (ISG) of the Social Protection Committee (SPC) has updated calculations on the Theoretical replacement rates. These calculations provide the possibility to look at individual case studies and evaluate to what extent current and future pension systems ensure that the elderly have the resources to support adequate standards of living.

This report has indicated that if career lengths remain unchanged over the next 40 years, the theoretical replacement rate calculations show a decline in many countries across Europe. The drop is more pronounced in statutory pension systems, and in nearly half of the EU Member States a double-digit percentage point decline in replacement rates can be expected from these schemes.

By contrast, future retirees are expected to accrue higher occupational and/or supplementary pensions. This development, however, needs to be monitored in light of extending the coverage and the maturity of these schemes.

Despite the decline in system generosity, this report finds that statutory pension systems tend to be progressive, providing significantly better replacement rates for those on lower incomes - thus helping to alleviate the risk-of-poverty. The report also suggests that statutory pension systems, in general, provide very good protection for post-retirement incomes against such lifetime events as childcare and unemployment.

Moreover, the calculations presented in this report indicate that in many countries, pension schemes provide very strong incentives towards later retirement, implying that if the length of the career increases in line with longevity, pension adequacy need not decline.

Theoretical replacement rates can be used to give policy makers indications of how different reforms and varying personal situations affect the pension income of an individual. Comparing differences in outcomes for different typical individuals, over time or at a given point in time is an important aspect of using theoretical replacement rates as they then act as a sort of sensitivity analysis.

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