Assessing pension reform sustainability in the EU - a framework based on pension wealth

Most assessments of pension reform sustainability focus on the projected fall in future spending. However the impact on pension adequacy, usually defined in terms of the anticipated change in theoretical replacement rates, is increasingly coming to the fore. In this paper we show that this adequacy measure has significant defects, related to it being a point-in-time indicator and the use of unrepresentative labour market assumptions. We argue that using adequacy indicators based on estimates of pension wealth (i.e. the total projected flow of pension benefits through retirement) calculated using more realistic assumptions give a more realistic assessment of changes to pension systems. Applying this framework to pension reforms enacted since the 1990s in ten major European countries, we find that while reforms decreased generosity significantly, the pension system’s effectiveness in alleviating poverty remains strong in those countries where minimum pensions were improved. However, moves to link benefits to contributions have raised clear adequacy concerns for women and for those on low incomes which policymakers should consider and tackle. Though reforms have reduced the financial challenge of ageing, in many countries fiscal pressures will persist and further reforms are likely.