Why do we observe higher and higher retirement insecurity over the years? This paper argues that an individual’s retirement insecurity hinges on the interplay between her registered pension scheme and the level of market volatility. A pension scheme reflects the extent to which pension investment risk is individualized, providing the seed for retirement insecurity. The fear for retirement was triggered as capital markets became more volatile over the past decade. Market volatility creates an immediate information shortcut for individuals when forming expectations about post-retirement income that will only be realized in the long run. Due to the “available information bias,” citizens have developed overall downward expectations of retirement income under growing market volatility, forming pessimistic perceptions about retirement. This pessimism is more striking among those with a Defined Contribution pension scheme than those with a Defined Benefit plan because of the risk individualization feature. The argument is tested with data from the British Household Panel Survey (BHPS). The findings suggest that individuals’ perceptions of insecurity in post-working life are driven by the type of pension plan in which they are enrolled and the degree of market fluctuation facing them.
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The surveyed countries include South Korea, Mexico, Spain, France, China, Brazil, Nigeria, South Africa, Kenya, Pakistan, the United States, Indonesia, Germany, the United Kingdom, Israel, Argentina, Egypt, Turkey, Japan, Italy, and Russia.
For example, risk loving people might prefer a DC scheme due to the potential high yield; High income earners might be more open to a DC scheme because only a smaller portion of their asset would be invested; People identified with the Conservative Party might be more supportive of a DC scheme because such reform was passed under Margaret Thatcher.
It is not entirely clear what it means to be “economically insecure” if the question asked is “how economically insecure do you feel.” Insecurity can come from the risk of job loss, from sudden declines of wealth, or from the financial burdens of insufficient health insurance, to name just a few. When the question is loosely defined, responses are likely to conflate the different dimensions of insecurity (Dominitz and Manski 1996). Moreover, the dimensions of risk confronting an individual might be different depending on which stage an individual is at in her life cycle (Whelan and Maître 2008b).
In many widely used cross-national public opinion surveys, such as International Social Survey Programme (ISSP) or European Values Study (EVS), job insecurity questions are included regularly in the questionnaires. Existing research tends to agree that job insecurity is associated with stronger support for the welfare state, especially support for unemployment insurance. Studies agree that labor market conditions are what account for the level of job insecurity, though arguments differ as to what the changing conditions are.
Of note, the ideal replacement rate is the average income replacement rate suggested for the society. Depending on one’s economic circumstance, one may need higher/lower income replacement rate is one is at the lower/upper end of the income spectrum. In other words, if we were to plot the ideal income replacement rate for everyone in the society, it would be a distribution centering around the 70% replacement rate.
While the benefit is highly dependent on the fund management, the extra fees associated with the investment (such as the management fee) matter too. All the extra fees would also eat up the benefit under the DC plan.
Briefly speaking, a pension system is typically composed of three layers. The first is a state provided (flat rate or subsistent) pension. The second layer is an earnings-related pension. Unlike the first layer, the pension benefit received in an employment-related pension is linked, to some extent, to the previous earning. The third layer is an individual’s voluntary private pension insurance. This layer provides extra protection for those who want a more guaranteed postretirement living standard. States usually play incentive creating roles at this layer, encouraging people to add extra protection through providing tax exempt for private contribution.
For example, in the United Kingdom, which underwent pension privatization in 1986, the government highlights this sentence on their pension investment website: “in the long run, pension should grow more than saving accounts (https://www.gov.uk/workplace-pensions/types-of-workplace-pensions)”.
In particular, in countries where the DC scheme is the only available plan that every eligible citizen is mandated to join, DC pension assets constitute 100% of the total pension assets. As of 2013, there are eight countries that only have a DC scheme as a mandatory plan: Chile, the Czech Republic, Estonia, France, Greece, Hungary, Poland and the Slovak Republic (OECD 2013, p. 28).
With respect to how the survey is sampled, BHPS selects a nationally representative sample of more than 5000 households, making a total of approximately 10,000 individual interviews. In the selected family, every individual older than 16 years old is interviewed. Once interviewed, the same individuals would be re-interviewed in successive waves until they split from the original family. To fully capture an individual’s life trajectory, for those who split from the original family and form a new family, all adult members in the new family would be interviewed.
SERPS was first introduced in 1978, and it was replaced by S2P in 2002/3 with a goal to expand social protection coverage to more economically disadvantaged people and people who cannot work due to disability or caring responsibility. In essence, S2P is the same as SERPS, providing pension related to earnings in working life as the second layer protection.
In reality, the provided scheme can be more complicated than merely a choice between the DB and the DC. In some scenarios, employers may provide a scheme that combines the features of both DB and DC plans.
40 years old seems to be agreed as roughly a cut point beyond which people start to worry about future retirement insecurity.
Besides 2001 and 2006, pension enrollment information was also collected on 2010 and 2012. However, data on 2010 and 2012 were damaged due to technical issues arising during the merging process, in which process BHPS was incorporated into a larger longitudinal study called Understanding Society (I confirmed the technical errors through email correspondence with data managers of the Understanding Society project, which BHPS was merged into. Those emails are available upon request.). The administrative error results in a mismatched sampling universe after the 2010 wave. Because of this error, we are left with only two waves of data (2001 and 2006) for our empirical analysis.
A selection bias problem happens when the correlation between the error term εi in the regression equation and the error term μi in the selection equation is nonzero. This violation can make the estimated coefficients biased and inconsistent. Treatment effect model accounts for this problem and generate consistent estimates. In the treatment effect model, the estimated ρ used to test whether Corr (εi, μi) is zero or not. If H0 : ρ = 0 is rejected, there is a selection bias problem and treatment effect model is preferable. Otherwise, there is no concern for selection bias problem and this advanced model is not needed. In the analysis, the p value for testing H0 : ρ = 0 is 0.75, indicating that there is no selection bias.
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Conflict of Interest
Wei-Ting Yen declares that she has no conflict of interest.
Informed content was obtained from individual participants included in the study.
Ethical Treatment of Experimental Subjects (Animal and Human)
This article does not contain any studies with human participants or animals performed by the author.
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Yen, W. Pension Plans and Retirement Insecurity. Ageing Int 43, 438–463 (2018). https://doi.org/10.1007/s12126-018-9326-x
- Old-age security
- Market volatility
- Welfare state
- Public pension
- United Kingdom
- Economic insecurity
- Retirement insecurity; BHPS