AIM - Adequacy of Old-Age Income Maintenance in the EU

How to make pension systems sustainable?

AIM - Adequacy of Old-Age Income Maintenance in the EU is a project funded under the 6th EU Research Framework Programme that aims at developing a new approach and new methods to assess the capacity of pension systems to deliver adequate old-age income maintenance while ensuring sustainable public finances.  The analysis covering the New Member States (NMS) reveals that since a majority of them have embarked on pension reforms, their prospects of sustainable public finances appear positive, while those of the income situation of the elderly are less promising.  Major reforms abolishing early retirement and increasing employability of societies are necessary to help provide the elderly with adequate incomes.  A balance between work and family life paired with additional work incentives is also critical to convince workers to remain longer on the labour market.

Country studies in the NMS generally point to a more advantageous relative income position of the elderly in contrast with younger generations1  thanks to generous retirement rules or favourable indexation of pensions.  The perspectives of maintaining a similar income situation in the future is not viable because the majority of NMS countries are undertaking pension reforms that link their future pensions with the capital accumulated over the working life.  This is expected to considerably reduce the income situation of the elderly by 2050, leading to lowering replacement rates or static current low rates.  The projections of the Center for Research on Pensions and Welfare Policies indicate worsening living standards for the elderly in Poland, Slovakia, France and Germany.

In Poland, the income that elderly derives from the public pension is considered high by NMS countries standards as demonstrated by high comprehensive replacement rates2.  The latter reflects a generous pension system and a strong intergenerational solidarity placed in the old pension formula, as well as low employment rates during transition.  The country presents however the lowest effective retirement age, a problem that has been addressed by the reform of the pension system.  Starting in 2009, early retirement options are to be reduced in order to extend the working lives, along with incentives such as increased accrual rates.  The distributional effects of the new pension system is to benefit lower income earners over higher ones, as the first should expect higher increases in accrual rates flowing from the determination of pensions on the sole basis of individual wages.  A well-designed labour market legal framework and policies remain vital to support a higher rate of employed elderly and to encourage workers in Poland to stay longer on the labour market.  Only via reforming public pension systems and providing incentives to raise employability among the elderly can the challenge of an ever aging population be sustainable for public finances.

CASE’s involvement in AIM3  focused on WP 6 (labour market aspects of pension reforms), WP8 (income inequality and social inclusion of the elderly), WP 9 (maintenance of standard of living after retirement) and WP10 (inter-and intra-generational solidarity).

The full version of the project summary is a contribution of Katarzyna Pietka.

1 Estonia is an exception to this general conclusion.  A substantial improvement in the income situation of the elderly, which can be explained by their accrued presence on the labour market, was however noted.

2 Comprehensive replacement rate or CORE is a WP9 measure chosen to reflect living standards after retirement.  CORE takes into account the entire household budget and family structure.  In other words, it is the equivalised income of pensioners as compared with that of the pre-retirement society.

3 The analysis for Poland was carried out by Katarzyna Pietka and Irena Topinska and by Katarzyna Pietka for Estonia in WP8.  Poland was also studied by Katarzyna Pietka in WP9 and by Agnieszka Chlon-Dominczak and Iga Magda in WP10.  Marek Góra, Mateusz Walewski, Anna Ruzik, Irena E. Kotowska, Joanna Stachura, Pawel Strzelecki, Justyna Skiba, and Chiara Monticone were contracted by CASE to perform the analysis for EU member states and some selected acceding and candidate countries in WP6 (not summarized here).