Assessing the Impact of the Reforms in Europe on the Sufficiency of Pensions

Many assessments of pension reforms focus on the projected fall in spending. However interest in the impact on adequacy, usually measured by means of theoretical replacement rates, is increasing, particularly amongst international institutions. In this paper we show that, while quite useful for cross-country analysis, theoretical replacement rates have significant defects. Since they are point-in-time indicators, they fail to account for the impact of indexation on the relative value of benefits throughout retirement. In addition, they tend to be based on unrepresentative assumptions, notably full-careers at the average wage. Moreover the impact of these defects is exacerbated by the type of reforms which have been carried out recently in Europe and by rising longevity. We argue a better understanding of the impact of reforms on adequacy could result from looking at indicators based on pension wealth estimates calculated using more realistic assumptions. Looking at ten EU countries, which have carried out significant reforms in the 1990s and early 2000s, we find that generosity decreased significantly, weakening systems’ effectiveness in alleviating poverty. Furthermore, moves to link benefits to contributions have raised concerns for women and for those on low incomes.