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Defining adequacy

Adequacy is not a question of how much is enough, but rather how much is enough for whom, says Pablo Antolín-Nicolás, principal economist at the OECD’s Private Pension Unit.
Pablo Antolín-Nicolás pauses slightly and carefully measures his words before answering. “My personal view is that politicians love to use the term ‘adequacy,’” he says. “But when it comes to defining what is adequate, it’s not that easy.”

The Author

Pablo Antolín-Nicolás

is the principal economist at the Private Pension Unit of the OECD Financial Affairs Division. Previously, he worked at the IMF and at the OECD Economic Department. He has published journal articles on aging issues as well as labor-market issues. Pablo has a PhD in Economics from the University of Oxford and an undergraduate degree in Economics from the University of Alicante.

Antolín, the principal economist at the OECD’s Private Pension Unit, is perhaps more comfortable thinking about policy issues than dealing with the press, but happily describes his work, vividly and with a surprising deal of professional passion. Currently he is seeking an answer to the very existential question of how much, exactly, is enough.

This may sound a somewhat abstract pursuit, but it has direct relevance to your wallet. Consider that the average pensionable age in OECD countries is set to reach 65 for both sexes by 2050, an increase of about 1.5 years for men and 2.5 years for women. But life expectancy is rising even faster, meaning that in all but five OECD countries, time spent in retirement will continue to grow over the next decades (OECD Pensions at a Glance, 2011).

The forecast is forcing governments to reform pension policies to balance sustainability of pension systems with adequate income levels for future retirees. This raises the inevitable question; what is adequacy? Or in other words: how much, exactly, is enough?

Antolín is seeking an answer. Together with his colleague Juan Yermo, he is conducting a study into pension adequacy, backed by the European Commission. It’s a monumental task, he reveals, and not necessarily one that will provide the straightforward answers that governments sometimes look for.

Defining adequacy, he says, is not a question of how much is enough, but rather, how much is enough for whom.

“We understand that in the end, governments and policy-makers want to have just one number, but one number is wrong,” he says, again after some thought. “It’s quite complicated, but the answer will be different for different income groups, and it will be different for the different genders and economic statuses.”


Launched in January 2012 as a pilot project, Antolín and Yermo’s Retirement Saving Adequacy studyThe OECD Retirement Saving Adequacy study will work with a deadline for an initial report on the United States, Germany, Chile, the Netherlands, the UK, France and Italy by the end of 2013. The study will continue after that and extend to other OECD countries. is not searching for a single figure, but instead attempting to reach a more useful, flexible set of definitions of the elusive concept of pension adequacy.

The outcome of the two-year project will be policy advice for governments and guidelines on how to target specific population subgroups to ensure that future retirees will have enough funds available to sustain an adequate living. The project is noteworthy because it aims for real insight into not only the different countries’ pension systems, but also socioeconomic groups and cohorts that make up the social fabric of those systems, Antolín explains.

“Up to now, many of the studies completed at the OECD and other institutions are about replacement rates of hypothetical individuals joining the labor market today and contributing for 45 years. We wanted to see what happens when you move on and look at actual individuals.”

To do this, the project will look at the resources actual individuals between 35 and 65 might have to finance their retirement at the time of leaving the labor market. Information is collected from household surveys and administrative data sets. This is then analyzed with the help of national experts by incorporating parameters such as employment status, participation in private pension plans, interest rates, rates of return on investment, productivity and inflation.


The next step is to define what the researchers call a country’s “specific reference income.” The reference income will serve as a pointer for researchers to generate a percentage number of future retirees likely to achieve adequate levels of retirement income. That is, how many retirees will have enough funds available once they retire.

The exercise, however, goes far beyond a simple calculus. Defining a country’s reference income is both complex and complicated, Antolín points out. Several factors must be considered, and the researchers are forced to take into consideration a host of potential hurdles.

“The big challenge is to define the reference income. What you call ‘adequate.’ There is a lot to discuss about this – it is the difficult part of it all.”

It is commonly said that 66%, or roughly two-thirds, of one’s final salary income is assumed as enough or adequate as a pension replacement rate. This, however, is an incorrect measure, Antolín says. An absolute amount or percentage replacement rate does not cover the full scope of needs different retirees may have, and to use it as a measurement for adequacy therefore becomes problematic. Replacement rates can only be treated in terms of adequacy if they are understood in relative terms, he explains.

“Saying that everybody needs 70% or 66% or two-thirds is not correct. One could argue that a low-income person needs 100%, a middle-income person two-thirds, and a higher-income person needs 50%. Usually higher-income people have other sources to tap into to finance retirement.

“If you tell me a high-income person gets a pension benefit of $5,000 a month, and that in terms of replacement rate is only 50% of his or her last salary, it seems low in terms of replacement rates. But in absolute amounts it’s not bad.” Similarly, retirement income adequacy may vary from country to country. “An American might need more retirement income than a German, because he will have to finance all his healthcare expenses, while in Germany this will be covered by the state. Having €1,000 a month in Germany, in Spain, in the US or in Australia is not the same. It depends on the specifics of the countries.”


One year into the study, there are nonetheless a few general findings and preliminary lessons to be learned, Antolín reveals.

“Some of the indicators that have come out of the preliminary analysis are, firstly, that status of the labor market is very important. People need to be working, having jobs, in order to build up savings. Retiring later is essential. You need to diversify the sources to finance retirement. You need a pay-as-you-go public system, and you need a funded system and to have the two complement each other. But the main message is that if you want to achieve a target retirement income with a higher likelihood, you need to contribute, and contribute for a long time.”

The preliminary findings resonate with earlier messages from the OECD, which have stressed the importance of later retirement and extending the coverage of private savings (OECD Pensions Outlook, 2012).

Still, there is some controversy linked to the project. As Antolín lets down his guard for a short moment, he invites a rare view into some of the arguments that must be going on behind closed doors.

The topic is controversial and does lead to intense discussions, he admits. It is a sensitive matter “because at the end of the day you have to say that a certain percentage of the people in a country are not achieving their target,” he says.

“We are also discussing the assumptions, we are discussing scenarios and the reference income. There are strong policy issues because, depending on what you choose, some countries will look better or worse.” This makes Antolín’s work potentially provocative, too. With a grin, the researcher comments that he hopes not all the controversies will be smoothed out in the backrooms of halls of power.

“I hope not,” he says. “It’s an important issue that needs to be discussed, even in public if necessary.”

Published by PROJECT M in May 2013 in New Perspectives, Cover image by Getty Images
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