Articles - Measuring adequacy of pension systems in EU countries

Measuring the multidimensional adequacy of pension systems in European countries

 By Filip Chybalski, Pensions Institute

 The paper presents a multidimensional approach to the adequacy of the pension system, recognising it as the most relevant in comparative analyses of pension systems, as well as more authoritative than a one-dimensional approach based exclusively on pensioners’ income calculated on the basis of the replacement rate. Adequacy of the pension system can be also understood to mean the effectiveness of pension system when assessing its ability to realize income objectives. Starting from the micro- and macro functions of the pension system, OMC and World Bank objectives in terms of pension adequacy, and taking into account the indicators used by the European Commission to monitor the attainment of OMC objectives, the paper presents the overall concept of multidimensional adequacy of a pension system. Three dimensions of adequacy are defined: income, poverty, and differentiation of pensioners’ material situation by gender. Next, sub-indicators measuring the individual dimensions of adequacy are proposed, along with an aggregation procedure based on the tools of multidimensional statistical analysis. First the sub-indicators are aggregated into synthetic indicators for individual dimensions, and finally the synthetic indicators for individual dimensions are aggregated into a single synthetic indicator of the adequacy of the pension system (APS). Based on the proposed procedure, the adequacy of the pensions systems of 26 European countries is measured, and the quality of this measurement is assessed.

 1. Introduction

 No matter how we define a pension system and its goals or functions, it is beyond doubt that its main goal is to provide adequate income during retirement. Research into the degree of attainment of this goal is usually limited to studying the level of pensions disbursed from the public or entire pension system, thus presenting a one-dimensional approach to the issue of pension system adequacy. The presented paper represents another approach to the topic, a multidimensional one, based on the microfunction of the pension system, namely the allocation of income over the lifecycle. The proposed concept of a theoretical approach to pension system adequacy and the proposal for its measurement was developed on the basis of the first group of objectives of the Open Method of Coordination (OMC) with regard to pension security, i.e. pension adequacy, and constitutes a slightly modified expansion thereof. The aim of this paper is to present and support the overall concept of multidimensional adequacy of the pension system, and to propose a method for its measurement using a synthetic measure. Adequacy of the pension system in the paper can be understood to mean the effectiveness of pension system when assessing its ability to realize income objectives. A presentation is made of the approach to pension system adequacy as found in the literature, followed by that proposed by the author, as well as theoretical and practical support for this approach, selection and description of measures of pension system adequacy, methodology for the construction of the adequacy measure based on multidimensional statistical analysis, and the measurement of this adequacy on the example of selected European countries. The paper ends with a summary featuring synthetic conclusions drawn from the analyses performed.

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