Retirees in Macedonia seem obsessed with shoes. The elderly in the former realm of sandal-wearing Alexander the Great spend double the European average on footwear. Retirees in Spain are clearly the continent’s chicest, outlaying the largest percentage on clothing, while retired Irish, ever willing to confirm a stereotype, devote a quarter of their nutrition expenditure to alcohol.
A glimpse at the figures from Eurostat, the statistics office of the European Commission, offers a fascinating and sometimes bizarre picture of national spending patterns, as well as of the interests of statisticians. According to the figures, no European of the 60+ generation travels by rickshaw, though why this is even included in a European survey is puzzling.
Norway is an interesting case. Retirees there spend double the average European outlay on cars. This is most likely a reflection of the nation’s tough tax code, which targets cars and other luxury goods, rather than an indication that Norwegian retirees are status- conscious petrol-heads.
According to the figures, elderly Finns spend the most on books and newspapers; the French on personal care, including hairdressers and beauty products; and the Portuguese a staggering 9% of total expenditure on restaurants and hotels. While some countries also provide categories for prostitution and narcotics, it appears no retirees are paying for these, or at least none are willing to admit it.
Within the European Union, 19 countries peg old-age pensions in some form to the development of consumer prices. Of these, Lithuania, France, Spain and Austria rely solely on price indexation to adjust future pension payments.
Yet, is the official consumer price index (CPI) really the right basis for pension increases? From the data, it appears that the consumption pattern of retirees is more exposed to inflation, so a policy linked to indexation may be failing to protect retirees from actual rises in the costs of living as they experience them.
HEALTH AND HOMES
How could this be? The official CPI itself is the consumer expenditure on a bundle of goods and services for the average household. If spending patterns among one age group differ significantly, indexation may not protect that group from spiraling costs in particular expenditures.
Price indexing low inflation/ deflation In the United Kingdom in, low inflation meant the annual pension increase was a measly 75 pence per week. This “derisory” pension increase caused social uproar, leading to extra benefits such as free TV licenses. In Poland in, a legislative change (inflation adjustment after cumulative changes reach 5%) saw pensions rise by a minuscule 0.5%. In protest, many Polish retirees sent the additional money in cash back to the social-insurance agency, causing immense logistical problems. Source: OECD Pensions, Purchasing-Power Risk, Inflation and Indexation,
According to Eurostat, the consumption expenditure of people 60+ deviates to some extent from those of the average household. The most pronounced differences can be found in health and housing expenditures. On average, elderly households in the EU spend approximately 2 percentage points (pp) more of their total expenditures on healthcare and 5.5 pp more on housing. As inflation of housing prices rose 40% faster and medical costs twice as fast as the overall CPI in EU countries from to, the actual loss of purchasing power for the older population might be higher than the official CPI suggests.
Data from the United States provide some support for the claim that retirees face a bigger loss in real purchasing power than the average household. There, the experimental CPI for the elderly (CPI-E), introduced in, tries to capture the consumption expenditure of the population aged 62 and over. As part of the approach, it places a higher weighting on healthcare and housing.
From December to December, the CPI-E rose an average of 3.1% annually. Over the same period, the official consumer prices only increased by 2.9% on average. So, when indexed to prices, headline CPI might be an unsuited measure to account for real changes in the costs of living that retirees face.
BACK TO BENEFITS
All of this indicates that the benchmark chosen for the pension peg is important to sustain payment adequacy in the long term. And, as the Eurostat figures indicate, the benchmark may also have to be weighted differently between countries.
For example, the most pronounced differences in consumption expenditure on housing and healthcare occur in the eastern countries of the European Union. Slovakians over 60 years of age spend roughly 40% of their expenditure on housing, 9.4 percentage points more than the national household average.
Elderly Romanians’ spending on healthcare is disproportionately high. With a share of 10.3%, they have the highest exposure to medical expenditure, which is 6.5 pp above the mean national consumption. But major differences are also apparent within the Euro zone. Finland’s older population, for example, spends 8.4 pp more on housing than the average Finnish household.
Linking pension payments to national CPI may be an inadequate way to assess the real cost of living that retirees face. This could be providing a false impression of the adequacy of pension benefits and, ultimately, may even undermine the adequacy of those benefits.
