Pension system architecture a factor of income inequality in old age

Pension system architecture within different countries in Europe is a factor of how much income inequality there will be in old age, according to University of Oxford professor, Bernhard Ebbinghaus.

Presenting his research, Reproducing labour market inequalities in old age pension income across Europe, at a seminar hosted by the Finnish Centre for Pensions (ETK) in Helsinki yesterday, 4 February, he explained the differing pension systems and how they impact poverty and inequality.

There are two types of systems, Beveridgean, named after the UK’s William Beveridge, and Bismarckian, named after Germany’s Otto von Bismarck. The Beveridgean system follows a multi-pillar approach, whereas Bismarckian is based on social insurance.

“They [the systems] have different implications in terms of poverty and inequality. In terms of poverty, of course, we really need to look at those basic pension systems. How generous they are, will everyone get it… compared to social insurance systems, [where we need to ask], is there means tested social assistance, or a social pension that guarantees at least a particular poverty rating level.

“In terms of poverty the public systems play a very large role, but if you think about inequality… then of course the whole architecture plays a much large role,” he explained.

Ebbinghaus stated that the extent to which pension systems are earnings related determines how much labour market inequalities are reproduced in old age, such as the gender pay gap.

The Beveridgean multi-pillar approach is seeing an increase in moving from defined benefit to defined contribution systems, which increases the risk to the individual, he said.

In terms of the basic pension for Beveridgean countries, he said the Netherlands and Denmark are model examples. These countries are the only two that follow the Beveridgean model that have a basic pension high enough to prevent poverty. He said the liberal UK has a less generous basic pension.

In terms of the Bismarckian system, he said France is country that still has a “relatively generous social insurance system”, whereas countries in Eastern Europe and the South Baltics have elements that are much less generous.

When it comes to poverty, Ebbinghaus said the higher the rate of the minimum pension, the lower the risk of elderly poverty. The main groups that are vulnerable to poverty in retirement are the lower educated, women (particularly single women), migrants and those over the age of 75.

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