Public Pension Replacement Rates - Essay Example

Public Pension Replacement Rates and Number Submitted Given the information that Social Security in the U.S. is often the most significant income program available for the elderly, it was noted that when looking at replacement income for prior earnings, the United States ranks 26th on the list, while Greece is 3rd. In this regard, the essay aims to address the following questions, to wit: (1) what are some of the causes of this variance? (2) What is the role of its Public Pension Replacement Rates on its debt burden?

Public Pension Replacement Rates Replacement rate is defined as “the percentage of a worker's pre-retirement income that is paid out by a pension program upon retirement. In pension systems where workers get substantially different payouts due to their differing incomes, replacement rate is a common measurement which can be used to determine the effectiveness of the pension system” (Investopedia, 2011, par. 1). In the United States, the pension replacement rate is revealed as 40% (Reno and Lavery, 2007, 1) compared to 70% - 80% in Greece (Nelson, Belkin and Mix, 2010, 4).

There is a variance in replacement rates which is caused by interplay of factors such as wage rates and profiles, broken career, and length of active life, among others. Variance in Replacement Rates According to the Indicators Sub-Group (ISG) of the Social Protection Committee (SPC) (2006), “variants include different lifetime earning profiles (linear profile from 80% to 120% and from 100% to 200% and concave profile) as well as one low wage variant (flat 66% of the average), but also the variants also include a calculation for a broken career” (9).

Other variants that cause disparities in pension replacement rates are age of retirement and career length, as well as the level of rate of return (ISG of SPC, 2006, 10). In the United States, for example, the study by Reno and Lavery (2007) indicate that replacement rates were considered fairly modest as compared to other member countries of the Organisation for Economic Co-operation and Development (OECD). As revealed, “of the 30 countries studied, U.S. replacement rates ranked 4th from the bottom for low earners, 5th from the bottom for average earners and 9th lowest for high earners.

Countries that have higher replacement rates generally spend a larger share of their national resources on Social Security pensions for retirees” (Reno and Lavery, 2007, 3). Role of Public Pension Replacement Rates on Debt Burden As the number and percentage of the aging population continue to rise, the amount to be earmarked to support and sustain pension replacement would be greater. Nelson, Belkin and Mix (2010) indicated that “an aging Greek population—the percentage of Greeks aged over 64 is expected to rise from 19% in 2007 to 32% in 2060—could place additional burdens on public spending and what is widely considered one of Europe’s most generous pension systems” (4).

If Greece continues to peg pension replacement rates at a high rate of from 70% to 80% of pre-retirement earnings, the amount of projected expenditure needed to sustain the projected increase in people due for retirement would considerably increase, adding more burden to service their current debts. To address this dilemma, Nelson, et.al. (2010) revealed that “measures will include raising the average retirement age from 61 to 63 (the statutory retirement age in Greece is 65) and calculating pensions on the basis of lifetime contributions as opposed to the last five years of earnings” (9).

Freezing state pensions is also seen as another effort to reduce the debt burden. As manifested, the role of pension replacement rates has significant contribution to the cost of servicing debts of an economy as funds channeled supposedly to retire debts would be used to support the increasing aging population, thereby creating more burden to the economy. References Indicators Sub-Group (ISG) of the Social Protection Committee (SPC) (2006). Current and Prospective Theoretical Pension Replacement Rates.

Retrieved 16 April 2011. < http://ec.europa.eu/employment_social/social_protection/docs/isg_repl_rates_en.pdf> Investopedia. (2011). Replacement Rate. Retrieved 16 April 2011. < http://www.investopedia.com/terms/r/replacement-rate.asp> Nelson, R.N., Belkin, P. and Mix, D.E. (2010). “Greece’s Debt Crisis: Overview, Policy Responses, and Implications.” Congressional Research Service. Retrieved 16 April 2011. < http://www.fas.org/sgp/crs/row/R41167.pdf> Reno, V.P. and Lavery, J. (2007). “Social Security and Retirement Income Adequacy.

” National Academy of Social Insurance. Retrieved 16 April 2011. < http://www.law.cornell.edu/socsec/course/course/readings/SS_Brief_025.pdf>