Rui Nicola - The complex nature of pension adequacy: some insights from dynamic microsimulation for Portugal

  • Presenting author: Rui Nicola (University of Southampton)

  • Authors: Rui Nicola; Maria Evandrou; Jane Falkingham

  • Session: C02A - Dynamic / Long term [3] - Wednesday 11:00-12:30 - Ceremonial Hall

Pension fiscal sustainability and adequacy are often seen as two sides of the same coin, yet they possess distinct historical trajectories within the European Union (EU) institutions. While fiscal sustainability has been a concern for the EU since the 1970s when the Economic Policy Committee was established to evaluate the budgetary implications of population ageing, pension adequacy has gained prominence over the past two decades. Pension adequacy encompasses various objectives of pension systems, such as income smoothing, poverty alleviation, and redistribution. It is a multifaceted and evolving concept that incorporates both individual and collective dimensions. The recent Pension Adequacy Report (2021) defines adequacy as the ability of pensions to “maintain the income of men and women for the duration of their retirement and prevent old-age poverty”, additionally taking into account factors such as pension duration and gender. This paper contributes to the discussion of the intricate nature of pension adequacy’s multiple dimensions by utilizing DYNAPOR, a dynamic microsimulation model developed specifically for Portugal. Given the gradual impact of pension policies over time, dynamic microsimulation modelling is particularly well-suited for analyzing and discussing the long-term distributional implications of pension policies. Drawing on the baseline scenario from the Ageing Report and additional policy scenarios for old-age pensions in Portugal, this research highlights instances where different elements of pension adequacy may have opposing effects. It illustrates a “coverage-adequacy paradox” and emphasizes the trade-off between individual and collective dimensions of pension adequacy. To gain a comprehensive understanding of pension adequacy over time, the research underscores the need to supplement the conventional set of pension adequacy indicators with a detailed longitudinal distributional analysis.