Replacement rates: Measuring the living standard after retirement
Friday, 5 April 2013: 9:20 AM
Harald Künemund, Univ.-Prof. Dr.
,
Empirical Ageing Research and Research Methods, Institut for Gerontology, University of Vechta, Vechta, Germany
Uwe Fachinger, Dr.
,
Department of Economy and Demography - Institute of Gerontology and Centre for Research on Ageing and Society, University of Vechta, Vechta, Germany
In our paper, we focus on the evaluation of old-age pension system as one of the core social security systems, which is by far the largest in quantity. A very common instrument to assess and compare pension systems over time or between countries is the replacement rate. This indicator is widely used in the discussion about the reconstruction of old age security systems. But until now, no generally accepted definition or measurement procedure exists. Some calculations are based on fictive “model households” or on constructed occupational careers, others are based on empirical data. In the latter case, aggregate data are used most often, for example by calculating the replacement ratio by dividing the average pension by an average income of workers. To make things worse, while the mathematical formula to calculate a replacement rate looks rather simple, the calculation could be very intricate. To adequately calculate replacement rates, at least the following questions have to be addressed:
– What types of income are taken into account both in the employment and the retirement phase?
– What statistical measures should be used – the mean or median? And what about further information about the distribution?
– Are the samples or points in time really comparable?
In our paper we will discuss the conceptual problems regarding this indicator first. Second, we will give an overview of the heterogeneous situation with respect to the use of replacement rates as a measure for the effectiveness of old age pension systems. It will be shown that the existing results of empirical analyses are hardly comparable. Third, to give an idea about the consequences of using different measures, we will present results of empirical analyses based on longitudinal micro data from the Research Data Centre of the German Federal Pension Insurance. Based on the discussion of the different constructions of replacement rates and on the results of the empirical analysis we will discuss requirements concerning the indicator and provide some recommendations on how replacement rates should be constructed to fulfil those requirements.
