Income during retirement: Sustainable and adequate?

In the literature it is widely accepted that people try to maintain their living standard after retirement. Old age security systems will “support” people in reaching that aim on the basis of incentives, disincentives, or through compulsory insurance during working life. However, with changing demographic and economic structures, a lot of discussion has taken place over the last decades on the sustainability of pension systems to ensure older people’s economic wellbeing during retirement.

In most countries, old-age security is designed as a three tier system composed of statutory, occupational, and private pension schemes. Reforms instituted through the years have led to increasingly greater individual responsibility in ensuring income sustainability during old age. This raises the question on how the income of retirees has changed and will change during retirement given the mix of pension sources.

Theoretically, people will make their decisions on consumption and saving during their lifecycle with respect to the institutional arrangements and legislation. But these conditions are variable over time and adjustments are not easy carried out. To make it even worse, people are confronted with different regulations at different stages of their working life. It is unclear, how this is reflected in the income distribution of the elderly.

The paper will give an overview of the existing theories on the income of households of older people. It will be shown, that it is not possible to draw a consistent conclusion on the basis of those theories regarding the distribution of income during retirement. Therefore it is necessary to undertake empirical analyses to see if and to what extent income differs between the elderly. The analysis will show, whether there are serious differences between specific groups, differentiated by age, sex, former occupational status, and cohorts. It will also be analysed, whether and how the income will change during later life, which is yet unclear.

The data used for the analysis of the income distribution have been taken from the sample survey of income and expenditure (EVS) of the Federal Statistical Office Germany.