PensionReforms
Veritas propter investigationem [Truth through research]
 
TitleAdequacy of Saving For Old Age in Europe (2009)
AuthorsElsa Fornero
 Annamaria Lusardi
 Chiara Monticone
InstitutionCenter for Research on Pensions and Welfare Policies
TopicsSaving for retirement
 Life-cycle model
 Retirement income adequacy
 Saving issues
 Decumulation issues
CountryEurope
Date Published2009
Date posted on PR24 Jun 2014
  
  
 
Fornero, E Lusardi, A Monticone, C, (2009). Adequacy of Saving For Old Age in Europe (2009) Center for Research on Pensions and Welfare Policies,

PensionReforms’ summary and comments

Most countries in Europe have reformed pensions by, mostly, shifting more towards Defined Contribution arrangements and cutting back on government-provided benefits.  This 2009 report looks at possible public policy issues associated with these changes and how individuals might react to the reformed pension environments.

 

Here are the questions posed by the report:

“What will be the consequences of reforms on the adequacy of retirement provisions?...

“How will households’ discretionary savings respond to changes in pension provisions?...

“Are conventional models really able to capture individual behaviour?...

“What can policy do to improve retirement saving choices?”

 

The report concentrates on what it calls the “income risk in retirement”:

“In dealing with these rather broad issues, this paper has chosen to concentrate on income risk in retirement, and therefore on pensions, as the main source of security in retirement, disregarding other risks, in particular those connected to participation in the labour market (such as unemployment, disability, and so on), even though lack of resources in retirement is typically the direct consequence of a poor working career.”

 

The report also puts issues associated with health risks to one side; also (more controversially in PensionReforms’ view) the impact of tax breaks on saving decisions.

 

The report’s first observation is that the old seem not to run-down their assets in retirement as traditional life-cycle models have assumed.  That probably emphasises the significance of pensions to income-security in old age.  However, “Assessing the adequacy of pension systems in practice is very difficult.”  The report reviews the various models but there seems to be a disconnect between what the models suggest is optimal behaviour and what individuals actually do or don’t do, such as a lack of forward-planning.  They also seem not to understand the things they should be thinking about.  That didn’t matter so much in a Defined Benefit past.

 

However, the lack of knowledge and lack of planning seems not to matter too much.  Overall, people seem to behave as they should.  A number of key “open issues” are listed including understanding the varying needs of different types of households, the lack of annuity purchases and the impact of heath and long-term care risks.  Perhaps housing equity gets in the way of consumption smoothing and lastly, what might be the link between “micro and macro dimensions”:

“…saving adequacy concerns two dimensions: the ability of public social protection systems to deliver adequate benefits (and services) in old age and the individual ability to save for one’s own future.  These two aspects should be further integrated, especially by looking at the link between efficient risk diversification and individual optimization.”

 

The report lists the organisations involved in research into these areas and calls for much better empirical evidence and a ‘wider’ view on the issues:

“As we have seen, the driving forces of household saving are far from being fully explained and there are many unresolved issues, including the link between the so-called optimizing and behavioural approaches, the latter drawing many insights from the psychological literature.  This draws attention to how important a stronger relation between economics, sociology, psychology, and other social sciences could be in achieving a better understanding of household behaviour.  It should be effective, and not just pay “lip service” to a trendy attitude.”

 

The report ends with three key questions:

“What will be the consequences of reforms on the adequacy of retirement savings?...

“How will household discretionary savings respond to changes in pension provisions?...

“Are conventional models really able to capture individual behaviour?...

“What can policy do to improve retirement saving choices?”

 

PensionReforms agrees that countries do not know enough about what their citizens think and do about retirement savings even to evaluate whether current policies are ‘fit for purpose’.  One key measure of efficacy is levels of poverty amongst the currently old.  Discussion on that crucial issue was largely missing from the report.  PensionReforms thinks it should be front-and-centre of any debate on retirement incomes.  Data will trump models that are driven by guesses about the future.

 

Regardless, the call for better, deeper data must be answered for each country in its own circumstances.  If we knew what was really happening, the optimal public policy responses will normally be clear. (File size 328 KB; 29 pp) 684

 

 

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