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Publi Pension Replacement Rates - Essay Example

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Most countries differ with regards to the basic elements considered in computing for the replacement rate. The base case varies per country as reported by the Indicators Sub-Group of the Social Protection…
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Public Pension Replacement Rates Public Pension Replacement Rates The public pension replacement rate varies depending on the country. Most countries differ with regards to the basic elements considered in computing for the replacement rate. The base case varies per country as reported by the Indicators Sub-Group of the Social Protection Committee (2006). One of these factors is the professional status. The workers may be grouped either as a public sector employee, self-employed or by professional sectors. The career length is another consideration. The retirement age also varies per country. Most countries consider 65 as the retirement age. Even the marital status is a point of concern for some countries. The earnings level of the worker is also taken into account. This level dictates the amount of their contribution. The duration of membership of a worker in the pension plan is factored in in the replacement rate computation. Another cause of the variance is the type of employment, whether it is full-time or part-time.
The public pension replacement rate was a major contributing factor in the debt burden of Greece. The average earner with a full career in an Organisation for Economic Co-operation and Development (OECD) country, of which Greece belongs, has a pension replacement rate of 58.7% of earnings (Organisation for Economic Co-operation and Development (OECD), 2007). However, in Greece, the replacement rate was at a high of 96% of earnings (OECD, 2007). This rate is considered to be very high. In 2010, Greece’s pension system had approximately 400 billion euros or $509 billion in unfunded liabilities (Oxford Analytica, 2010). The excessively high replacement rate forced the Greek government to make emergency grants to meet the pension outlays (Oxford Analytica, 2010). Nektarios describes the Greek public pension system as one which is “highly segmented and complex, containing over 300 funds, with many different regulations for pension rights” (n.d.). Because of these characteristic of the public pension plan, it was difficult for the government to manage. One proof that the public pension replacement rate contributed largely on the debt problem of Greece are the reforms in the pension plan that were instituted by the EU and the IMF. Some of these reforms that were dictated upon on Greece include introduction of a unified statutory retirement age of 65 by December 2013; the gradual increase in the minimum contribution period for retirement; and the reduction of pension benefits to be based on the pensioners average pay over their working lives rather than the top 5 out of the last 10 years of earnings (Oxford Analytica, 2010). The most important reform in Greece’s public pension replacement rate is the lowering the replacement ratio to 64% (Oxford Analytica, 2010).
Clearly, from the experience of Greece, one can conclude that public pension replacement rates have a huge impact on the economy of a country. If the base computation for the rate is questionable and not justified, the government might have difficulty managing the funds in the future, like the experience of Greece. One does not question the generosity of governments in granting pension benefits but whatever replacement rate they decide should take into consideration their financial capability to support such system.
Indicators Sub-Group of the Social Protection Committee. (2006, May 19). Current and prospective theoretical pension replacement rates. Retrieved July 5, 2012, from
Nektarios, M. (n.d.). Financing public pensions in Greece. Retrieved July 5, 2012, from
Organisation for Economic Co-operation and Development. (2007, September). Closing the pensions gap: The role of private pensions. Retrieved July 5, 2012, from
Oxford Analytica. (2010, July 15). Greece bites the bullet on pension reform. Retrieved July 5, 2012, from Read More
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