M_PAPAMICHAIL
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Transcript of M_PAPAMICHAIL
Measurements of Adequacy and Sustainability.
Mechanisms of redistribution and financing against poverty
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Adequacy:
“As long as no reliable prospective income indicators exist, which allow one to one to evaluate the effect of more structural changes on future benefits, the rather short term policy-making process may favour the principal of financial sustainability.”
Eckart 2005
Budapest 20/09/2013, Marianna Papamichail
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Sustainability:
Financial sustainability after crisis has proclaimed as the major issue in the European Union. Unfortunately citizens and politicians were unwilling to deal with the matter before head contributing to inflating its final austerity impact.
Budapest 20/09/2013, Marianna Papamichail
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Measurements of Adequacy Pros and Cons
Budapest 20/09/2013, Marianna Papamichail
Advantages Disadvantages GreeceTheoretical Replacement Ratio,TRR
Numerous cases can be examined e.g. wage profile, career profile, age profile
cases are data sensitive, lack of dataisolated casesstatic
Benefit Ratio, BR global indice too compactserves also as sustainability measurement
General Average Replacement Ratio, GARR
global indicepoverty issues not captured
35%**
Net Pension Wealth/Net Pension Wealth Requirement to remain out of risk of poverty (1)
poverty issues well captured case sensitive
sustainability issues can be examined
fully comparable between countries
not representative, e.g. Greece
100%*
40%**
72%***
Budapest 20/09/2013, Marianna Papamichail
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(1) Net pension wealth
Net Pension Wealth =
Net Pension Wealth requirement to remain out of the risk of poverty =
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o The net pension wealth is measured at age a values
a : active’s current age
h : retirement age
W : termination age of life table
Bs(h) : pension expected at age (s) attributed for the first time at
age h
Povs(h) : amount of poverty threshold expected at ages (s)
i.e. after retirement
: probability of an individual aged a to survive until the age s
Budapest 20/09/2013, Marianna Papamichail
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o Assumptions for the calculation of the net pension wealth: Average age of active in 2010 = 36 Average retirement age in 2040 = 66 Termination age of life table =100 Net pension = 90% of gross pension Density = 80%
Bs(h) is indexed by the pension indexation while Povs(h) is indexed by the wage indexation. So in 2040, when the individual retires, the ratio of initial pension to poverty threshold is 94% while the final ratio over the long run capturing all pensionable life of pension wealth drops to 72%
Budapest 20/09/2013, Marianna Papamichail
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Observed inequalities between Genders: Males and femalesGenerations: Individuals
employed before 1993 and after 1992
Ages: People of different ages
Income Inequality between employees in 2010
Budapest 20/09/2013, Marianna Papamichail
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For any particular group the gap between the poorer and the wealthier of each group is defined here as the ratio of the wage of earners belonging to the 10% highest percentile to that of the lowest 10% percentile. The bigger the inequality gap between the poorer and the wealthier employees the more significant the adequacy issue between future pensioners.
Income Inequality between employees in 2010
Budapest 20/09/2013, Marianna Papamichail
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Figures from examined groups: 1. Men pre 1993, wage gap =9
0
5000
10000
15000
20000
25000
15-25
26-35
36-45
46-55
56-65
66-76
Gross salary distribution Males Pre 1993 Gross salary distribution Males Pre 1993 Gross salary distribution Males Pre 1993
Average salary = 16.000,00 euros
Budapest 20/09/2013, Marianna Papamichail
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Figures from examined groups: 2. Women pre 1993, wage gap = 7,8
0
2000
4000
6000
8000
10000
12000
15-25 26-35
36-45 46-55
56-65 66-76
Gross salary distribution Females Pre 1993
16.000,00 euros
Budapest 20/09/2013, Marianna Papamichail
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Figures from examined groups: 3. Men post 1992, wage gap = 10
0
5000
10000
15000
20000
25000
15-25 26-35
36-45 46-55
56-65 66-76
Males Post 1992Gross salary distribution Males Post 1992
13.300,00 euros
Budapest 20/09/2013, Marianna Papamichail
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Figures from examined groups: 4. Women post 1992, wage gap = 8
0
5000
10000
15000
20000
25000
30000
35000
15-25 26-35
36-45 46-55
56-65 66-76
Gross salary distribution Females Post 1992
13.300,00 euros
Budapest 20/09/2013, Marianna Papamichail
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Poverty threshold in 2010 = = 60% of Median Income = 6.591 Euros
Median Income is 10.985 Euros
Poor income earners: of income* below 6.591 Euros
Medium income earners: of income between 6.591 and
10.985 Euros (median income)
High income earners: of income higher than 10.985 Euros
Measuring poverty between employees and pensioners
Budapest 20/09/2013, Marianna Papamichail
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Poverty between employees in 2010
males pre females pre males post females post
Active population at risk of poverty percentages
5 % 12 % 31 % 38 %
Average gross annual wage of poor employees
3.600,00 € 3.700,00 € 3.315,00 € 3.460,00 €
Budapest 20/09/2013, Marianna Papamichail
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Poverty between pensioners in 2040
males pre females pre males post females post
Pensioners’ population at risk of poverty percentages
42 % 40 % 67 % 87 %
Average gross annual pension of poor pensioners in 2010 prices
5.960,00 € 5.902,00 € 5.869,00 € 5.887,00 €
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Mandatory measure also adequacy in in sustainability studies by using common indicators
Develop representative replacement ratios weighed according to groups of people included
Explore possibilities to tackle poverty and quantify amounts required
Explore the potential use of redistribution mechanisms from high to low come earners
How to overcome constraints in measuring
adequacy along with sustainability
Budapest 20/09/2013, Marianna Papamichail
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Example: The exercise Establish three (or more) wage bands
reflecting actual poverty thresholds (indigence etc.) as follows
Low: Below poverty threshold
Medium: Of median income
High: Over median income
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Two pension old age expenditure results in 2040 are compared
1. Without any change, A
2. By shifting poor pensions to poverty line, B
Quantified additional amount required for poverty alleviation in 2040 is the difference of the pension expenditures: D = B-A
Propose an automatic adequacy redistribution from the higher to the lower pension/ income bands according to the replacement ratio. The upper limit could be established at 60% (15 pp more than the suggested RR according to ILO’s act)
Methodological approach
Budapest 20/09/2013, Marianna Papamichail
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A = 4.614
B = 5.113
D = 499 , so B is 10.81% higher than A
Amount D should be insured either by state budget, or from new sources or as a combination of state’s and medium and high income pensioners contribution. After social dialogue a formula of automatic adequacy redistribution mechanism from the higher to the lower pension/ income bands could be explored. The minimum replacement rate for all wage bands could be established at 60% (15 pp higher than the RR suggested according to ILO’s act)
2040 old age pension expenditure in 2010 prices
(millions of Euros)
Budapest 20/09/2013, Marianna Papamichail
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Budapest 20/09/2013, Marianna Papamichail
Comparison of pensioners'
income zones 2010-2040
Number of pensioners
Amount of icome zone benefits in
millions Euros
Average icome zone benefit
Income zone population percentage
Ratio of income zone benefits to
total
2010 1.363 8,58 € 6.296,08 € 0,34% 0,27%2040 341.043 2.012,91 € 5.902,23 € 55,20% 43,62%
2010 12.497 94,10 € 7.529,61 € 3,10% 2,96%2040 210.792 1.875,61 € 8.044,15 € 34,12% 40,65%
2010 389.841 3.071,42 € 7.878,67 € 96,57% 96,77%2040 66.045 725,62 € 10.986,73 € 10,69% 15,73%
POOR, up to 6.591,00 Euros (poverty line)
MEDIUM, from 6.592,00 Euros to 10.985,00 Euros
HIGH, from 10.986,00 Euros and over
prices are in 2010 values
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Sustainability or adequacy?ADQ more reliable
measurements should start
being developed
SUSTAINABILITY should focus on income
and on adequacy
sustainadequacy
Budapest 20/09/2013, Marianna Papamichail
Budapest 20/09/2013, Marianna Papamichail
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References: How best to measure pension adequacy Aaron George Grech, April 2013
The 2012 Ageing Report, European Commission 2/2012
Pension Adequacy in the European Union 2010-2050