Abstract
Replacement rates have gained acceptance as a useful metric for assessing the conditions of retirees and households at point of retirement. Here we use data from the SHARE longitudinal database to investigate income dynamics within a comparative European context. Our analysis, centering on households as opposed to the individuals on whom international data commonly focus, reduces replacement rates to their components—pension, work income, etc.—and looks at the dynamics among household members in relation to work and pension income.
Total replacement rates vary widely among the fourteen countries sampled: overall replacement rates are around the Bismarckian 70% across the entire sample, 80% in countries that have Social Democratic and Continental social-policy regimes, and 60% in countries that have East European and Middle Eastern regimes. Looking at the pension and wage components, however, the latter accounts for about 30% of household income—an important fact for decision-makers to consider. Couples tend to retire together, especially if close in age, and work income compensates amply for lower pension income. The Gini coefficients of our sample are compared before/after retirement to determine whether the social programs that underlie pensions mitigate income inequality after retirement.
Finally, we examine the well-being and quality of life of retirees and their households. We find a positive correlation between replacement rate and indicators of retirees’ and their households’ quality of life, e.g., satisfaction with life, ability to consume healthcare services, and ability to cover unforeseen expenses.
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Source: Author’s computations based on SHARE Wave 5 and Wave 6 databases
Source: Authors’ computations based on SHARE Wave 5 and Wave 6 databases
Source: Author’s computations based on SHARE Wave 5 and Wave 6 databases
Source: Author’s computations based on SHARE Wave 5 and Wave 6 databases
Source: Author’s computations based on SHARE Wave 5 and Wave 6 databases
Source: Author’s computations based on SHARE Wave 5 and Wave 6 databases
Source: Author’s computations based on SHARE Wave 5 and Wave 6 databases
Source: Author’s computations based on SHARE Wave 5 and Wave 6 databases
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Notes
The Gini coefficient is a measure of statistical dispersion intended to represent the income inequality or wealth inequality within a nation or any other group of people. It ranges between 0 and 1, where 0 is full equality and 1 is maximum inequality. The calculation of the Gini index in this study is based on total household income under each of the welfare regimes before or after the head of household’s retirement and on the component of work income or of pension income that the household has at each investigation time.
Importantly, the resulting sample avoids the problem of over- or under-representation of any particular population group on the basis of geographic location, because the SHARE research sample is chosen in a way that assures accurate representation of each relevant group.
For a detailed discussion of the use of this variable in international comparisons, see Jürges (2007).
To avoid a situation of endogeneity and causation between the household-income variable and the health variables at the same investigation time, we estimated each of the equations with health variables (self-rated health status /EURO depression/ADL/IADL) in the previous period (a lagged variable) as the explanatory variables. This obviated the possibility of endogeneity and causation between the variables.
Income elasticity is measured as the ratio of the percentage change in income at Time 2 to the percentage change in income at Time 1.
The replacement-rate equation was estimated using an OLS regression model and not a fixed effect (panel) model basically because the dependent variable was constructed on the basis of only two years’ data.
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Acknowledgements
This paper uses data from SHARE Waves 5 and 6 (DOIs: 10.6103/SHARE.w5.700, 10.6103/SHARE.w6.700) see Börsch-Supan et al. (2013) for methodological details. The collection of SHARE data was funded by the European Commission through FP5 (QLK6-CT-2001-00360), FP6 (SHARE-I3: RII-CT-2006-062193, COMPARE: CIT5-CT-2005-028857, SHARELIFE: CIT4-CT-2006-028812), FP7 (SHARE-PREP: GA N°211909, SHARE-LEAP: GA N°227822, SHARE M4: GA N°261982) and Horizon 2020 (SHARE-DEV3: GA N°676536, SERISS: GA N°654221) and by DG Employment, Social Affairs & Inclusion. Additional funding from the German Ministry of Education and Research, the Max Planck Society for the Advancement of Science, the U.S. National Institute on Aging (U01_AG09740-13S2, P01_AG005842, P01_AG08291, P30_AG12815, R21_AG025169, Y1-AG-4553-01, IAG_BSR06-11, OGHA_04-064, HHSN271201300071C) and from various national funding sources is gratefully acknowledged (see www.share-project.org).
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Tur-Sinai, A., Spivak, A. How Generous are Societies Toward Their Elderly? A European Comparative Study of Replacement Rates, Well-Being and Economic Adequacy. Soc Indic Res 162, 71–105 (2022). https://doi.org/10.1007/s11205-021-02822-4
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DOI: https://doi.org/10.1007/s11205-021-02822-4