Pension wealth gaps in a system with disintegrated retirement - - PowerPoint PPT Presentation

Pension wealth gaps in a system with disintegrated retirement arrangements

Roman Raab Keele University Conference of the Pension Policy Research Group, Trinity College Dublin, 17 June 2015

Motivation

◮ Irish pension delivery follows philosophy of basic State Pension and

privately organised complementary savings for retirement.

◮ Coverage with complementary pensions has been low. ◮ Concerns about inadequate retirement income and equality outcomes

within current setup of pension delivery, e.g., Green paper on pensions (2007) and National pensions framework (2010).

◮ Study equality outcomes: looking at gaps across retirement income

sources, over time, gender and position in pre-retirement earnings distribution.

Motivation, cont’d

◮ Adequacy of retirement income:

◮ Question: How much do people save for retirement? ◮ Optimal allocation of consumption and savings over life-cycle. ◮ Retirement-consumption-puzzle.

◮ Equality of retirement income:

◮ Question: How does one’s pension compare to others’ pensions? Similar

standard of living in working life.

◮ Gap concept is pure outcome-equity measure.

Income sources in retirement

◮ State Pensions

◮ Flat rate benefit from age 65 ◮ About 230 Euros per week

◮ Occupational pensions

◮ Mandatory only for civil servants ◮ Most firm pensions are defined benefit schemes ◮ Benefits usually based on final salaries

◮ Social Welfare Programs

◮ Examples: Jobseeker’s Benefit, Jobseeker’s Allowance, Invalidity Pension ◮ May substitute lack of early retirement program ◮ Flat rate benefits close to State Pension level

◮ Private Pensions

◮ Relatively new option ◮ Coverage is currently only 13 percent of workforce

Coverage by retirement income source

◮ Two major coverage scenarios

• 1. State Pension and Social Welfare: 46 percent
• 2. State Pension and occupational pension: 37 percent

◮ Pension coverage of workforce in 2008 (in percent aged 20 to 69)

SP SP + OP SP + IP SP + OP + IP Total workforce 46 37 13 4 Men 44 34 18 4 Women 49 40 7 4 Public administration 7 86 n/a 6 Hotels and restaurants 77 9 14 n/a Professionals 25 55 13 7 Sales 67 23 8 n/a Source: CSO (2008)

Pension wealth gaps

◮ Pension wealth - net present value of expected pension payments over

retirement; variation by

◮ Retirement age ◮ Gender ◮ Pre-retirement earnings (except State Pension)

◮ Pension wealth gap - comparing pension wealth of agents from two

different income sources; variation by

◮ Retirement age, gender, pre-retirement earnings ◮ Pension coverage

Simulations: Key parameters

◮ Simulation of gap-age-profiles

◮ Retirement window over ages 55 - 67 ◮ Representative agents at low/medium/high pre-retirement earnings ◮ Separate by males and females

◮ Three major country specific retirement income sources

◮ S1: Social Welfare and State Pension ◮ S2: Civil service occupational pension ◮ S3: Typical private sector occupational pension and State Pension

◮ Other parameters

◮ Retirement age for State Pension: minimum 65 ◮ Early retirement possible in occupational pension schemes ◮ Applying income and payroll tax rules of 2008 ◮ All numbers in real terms, and discounted to reference age 55

◮ Simulations distinguish between 18 representative cases

Simulations: Gaps at average industrial wage

Figure: Pension wealth and gaps, AIW

Simulations: Gaps at 50 and 150 percent of AIW

50 percent of AIW 150 percent of AIW

Conclusions

◮ Irish pension delivery generates significant inequalities in outcomes. ◮ S3-S1 gaps are highest relative to other gaps and increase in the age of

retirement; maximum: over 250 percent difference in the high portion of the income distribution.

◮ Flat rate pensions organized by government, large inequalities may arise

unless a second pillar of income in retirement is universally implemented.

◮ Pension reform initiatives since 2006 have addressed these equality

issues; the remedy of automatic enrolment into a second pillar is correctly chosen.

◮ Second pillar retirement income managed by private companies is

subject to financial market risk.