The 2021 pension adequacy report has been published

Dr. S-W – 06/2021

Principle 15 of the European Pillar of Social Rights has promoted the right to an adequate retirement income since 2017. The pension adequacy report, which is published every three years by the EC and the Social protection committee, has always supported this concern (not just since 2017) with detailed analyses, both of the current situation and of developments that can be expected in the future. As before, this is based on two criteria: Are pensions adequate to ensure that living standards can be maintained and do they prevent poverty in old age?

The 2021 adequacy report addressed developments over the last three years (up to 2019). After a decline in poverty and social exclusion (lack of access to basic goods) amongst older people, the figures have risen slightly again throughout the EU in recent years and Germany is slightly higher with 18.5%. The "depth" of poverty, i.e. the average distance from the poverty line, has also increased.

Low retirement incomes are often the result of low earnings and interrupted working careers. Therefore, old-age poverty is often problem faced by women. The gender-based "pension gap" is still 29.5% (2019), but it has at least fallen by 2.8 percentage points since 2016, and it has also narrowed in Germany. Model calculations for four countries show that the pension gap will narrow significantly by 2050 due to career changes. 

It is interesting to note that the length of retirement has been shortened in many countries: The retirement age is rising faster than life expectancy. An average of 40 years are spent actively and 20 years are spent in retirement during a life cycle. 

The report explains in great detail the pension reforms implemented since the last report. Only a few should be highlighted here: the strengthening of the wage replacement function, the reversals or postponements of increases in the retirement age that have already been decided upon, improving access for the self-employed and improving the pension entitlements for care work. However, the main focus of these reforms was on reducing old-age poverty. 

As for the future, the report unequivocally warns of a decline in pension levels. Those, who retire in 2059 will have a lower pension in relation to their earned income than a new retiree had in 2019 - even in the same career. The report also projects comparatively longer employment histories. However, they will still lag behind the increase in the statutory retirement age. Methodologically, this statement is based on a comparison of theoretical compensation rates. It is "theoretical" because it is based on sample cases. "Compensation" is attained by comparing the level of the first pension payment with the level of the last salary before retirement.

For example, today's (2019) net compensation rate (taking taxes into account) is 57.8% in Germany, which is in the lower range when compared to the "Netherlands", who are the frontrunners with over 100%. However, the quasi-mandatory second, occupational pillar was included in the latter case; otherwise, the figures would be significantly lower. In the future, i.e. by 2059, the report sees the level falling dramatically in many Member States, whereas it should rise slightly in Germany.

Even though COVID-19 may leave its mark on entitlements in the long term, this year's report has not touched on the subject yet, as this seems premature.

The adequacy report is not limited to the presentation of facts and projections, as it also contains repeated policy recommendations. It also includes the advice (not new) to place old-age provision on a broader financing basis in a changing economic and labour market environment and against the background of demographic change, especially through progressive contribution structuring. Wage-related contributions should also be further supplemented by other sources that are less of a burden on earned income, such as capital gains or assets. The French solidarity tax is specifically mentioned as an example of funding base diversification and the revenue from it is targeted at social protection systems. The possible contribution of consumption taxes and especially environmental taxes towards the financing of social protection was cautiously discussed. Member States are urged to do more to address gender inequality, by developing credits for care-related career breaks. Atypical and self-employed work should be better protected.