Income replacement in a three tier pension system

The central aims of old age pension systems are the avoidance of poverty and the maintenance of living standards and quality of life in old age. In most countries, old-age security is designed as a three tier system composed of statutory, occupational, and private pension schemes. This raises the question on how the maintenance of living standards and quality of life, i. e. the replacement of income and its changes during retirement, can be measured given the mix of pension sources.

Today it is unclear, how retirement income from different sources can be adequately compared to the income which is replaced by it. In this paper, a closer look is taken at the mixtum compositum of old age income and at the different methods concerning the adequate measurement of replacement rates. The specific aspects are illustrated for Germany by using an unbalanced panel data from the Socio-Economic Panel Study covering the period 1991-2010. The longitudinal study provides empirical evidence of the development of income from different pension sources of retirees and the consequences of using different methods for the measurement of the replacement rate. The paper offers insights into the relevance of adequate measurement of pension adjustments in assessing income replacement in a three tier pension system for ensuring the standard of living on an individual level.