The document discusses measuring the adequacy and sustainability of social protection systems. It notes that adequacy measurements need to consider both poverty issues and sustainability. Representative replacement ratios weighted for different population groups are proposed to better capture adequacy. An example method is outlined to quantify additional funding needed to alleviate poverty among pensioners in 2040 and propose an automatic redistribution mechanism from higher to lower income pensioners. The document concludes that adequacy and sustainability measurements need to be further developed and should focus on both income and ensuring adequate protections.

1. Measurements of
Adequacy and
Sustainability.
Mechanisms of
redistribution and
financing against
poverty

2. 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
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Budapest 20/09/2013, Marianna Papamichail

3. 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.
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Budapest 20/09/2013, Marianna Papamichail

4. Measurements of Adequacy
Pros and Cons
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Budapest 20/09/2013, Marianna Papamichail
Advantages Disadvantages Greece
Theoretical Replacement
Ratio,
TRR
Numerous cases can be
examined e.g. wage profile,
career profile, age profile
cases are data
sensitive, lack of
data
isolated cases
static
Benefit Ratio, BR global indice too compact
serves also as sustainability
measurement
General Average
Replacement Ratio, GARR
global indice
poverty 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%***

5. (1) Net pension wealth
Budapest 20/09/2013, Marianna
Papamichail
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Net Pension Wealth =
Net Pension Wealth requirement to
remain out of the risk of poverty =

6. 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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7. 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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8. Observed inequalities between
Genders: Males and females
Generations: Individuals employed
before 1993 and after 1992
Ages: People of different ages
Income Inequality between
employees in 2010
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Budapest 20/09/2013, Marianna Papamichail

9. 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
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Budapest 20/09/2013, Marianna Papamichail

10. Figures from examined groups:
1. Men pre 1993, wage gap =9
10
-5000
0
5000
10000
15000
20000
25000
15-25
26-35
36-45
46-55
56-65
66-76
Gross salary distribution Males Pre 1993Gross salary distribution Males Pre 1993Gross salary distribution Males Pre 1993
Average salary = 16.000,00 euros
Budapest 20/09/2013, Marianna Papamichail

11. Figures from examined groups:
2. Women pre 1993, wage gap = 7,8
11
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

12. Figures from examined groups:
3. Men post 1992, wage gap = 10
12
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

13. Figures from examined groups:
4. Women post 1992, wage gap = 8
13
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

14. 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
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Budapest 20/09/2013, Marianna Papamichail

15. Poverty between employees
in 2010
15
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

16. Poverty between pensioners in
2040
16
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 €
Budapest 20/09/2013, Marianna Papamichail

17.  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
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18. 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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19. 19
 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

20. 20
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

21. 21
Budapest 20/09/2013, Marianna Papamichail
Comparison of
pensioners'
income zones
2010-2040
Numberof
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 6.591,00Euros (poverty line)
MEDIUM, from 6.592,00Euros to 10.985,00Euros
HIGH, from 10.986,00Euros and over
prices are in 2010 values

22. Sustainability or adequacy?
ADQ more reliable
measurements
should start being
developed
SUSTAINABILITY
should focus on
income and on
adequacy
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sustainadequacy
Budapest 20/09/2013, Marianna Papamichail

23. 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
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Papamichail
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24. Thank you
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Budapest 20/09/2013, Marianna Papamichail