Prepared for Retirement?

Prepared for Retirement? The Adequacy and Distribution of Retirement Resources in England

Prepared for Retirement? Introduction

An ageing crisis? • Projections for next 50 years suggest: • population to continue ageing: 20–64 year olds: 35.7m in 2006 to 35.6m in 2056 65 & over: 9.7m in 2006 to 17.5m in 2056

An ageing crisis? • Projections for next 50 years suggest: • population to continue ageing • but public finances financially sustainable: 6.2% of national income in 2004–05 to 6.6% of national income in 2054–55

An ageing crisis? • Projections for next 50 years suggest: • population to continue ageing • but public finances financially sustainable • Is further reform needed to facilitate appropriate retirement and saving decisions?

Are individuals saving ‘enough’? • Assessing optimality of current behaviour would require detailed information on: • expectations of future income and needs • preferences (impatience and risk aversion)

Are individuals saving ‘enough’? • Assessing optimality of current behaviour would require detailed information on: • expectations of future income and needs • preferences (impatience and risk aversion) • Current situation depends on events to date compared to previous expectations

Are individuals saving ‘enough’? • Different benchmarks of adequacy used • Minimum absolute standard • Relative to current income / earnings • Retirement needs potentially financed from: • current pension wealth • current non-pension wealth • future income

English Longitudinal Study of Ageing • Large survey representative of individuals aged 50+ in households in England • 12,000 individuals interviewed in wave 1 (2002–03) of which 4,687 aged between 50 and SPA • Individuals to be re-interviewed every 2 years • Will enable analysis of retirement outcomes of the same individuals

English Longitudinal Study of Ageing • Wealth • net financial wealth • owner occupied housing wealth • other physical assets • pensions • Expectations • Including: longevity, employment, inheritance • Income, demographics, economic activity and health

What about the under 50s? • Difficult to learn much from those 50+ • Required adjustment larger • increased longevity • reduced state pension relative to average earnings • declining investment returns • Use of owner-occupied housing wealth • we assume half spent by those aged 50 to SPA • what inheritances do the next generation expect?

Prepared for Retirement? Distribution of retirement resources and expectations

Outline • Level, distribution and type of retirement resources • Expectations of future events • Comparison of expected and predicted future income from private pensions

Pension wealth • State pension wealth • Private pension wealth

Pension wealth • State pension wealth • Basic State Pension • SERPS/S2P • Private pension wealth

Pension wealth • State pension wealth • Basic State Pension • SERPS/S2P • Private pension wealth • Current defined benefit (DB) • Current defined contribution (DC) • Past pensions in receipt • Past pensions not in receipt (retained rights)

Distribution of family pension wealth Source: ELSA, All 50 to SPA

Sources of pension wealth Mean pension wealth Pension wealth decile Source: ELSA, All 50 to SPA

Other sources of wealth • Individuals may have accumulated wealth in other forms: • Financial wealth • Business wealth • Property wealth • Owner-occupied housing wealth

Correlation between pension wealth and non-pension wealth Total pension wealth Total non-pension wealth decile Source: ELSA, All 50 to SPA

Sources of total wealth Mean wealth Total wealth decile Source: ELSA, All 50 to SPA

Characteristics associated with high wealth • Older • High current income • High education • High numeracy • No reported health problems • Self-reported retired

Characteristics associated with high wealth – employment status Those with house and private pension Those with house or private pension Neither house nor private pension All Source: ELSA, All 50 to SPA

Expectations of future events • Are there any future events that mean individuals do not currently need high levels of wealth? • Receiving an inheritance in the future • Working longer • Dying younger

“Now I have some questions about how likely you think various events might be. When I ask a question I'd like you to give me a number from 0 to 100, where 0 means that you think there is absolutely no chance an event will happen, and 100 means that you think the event is absolutely certain to happen.” … What are the chances that you will live to age 75? Measuring expectations

Expectations of receiving an inheritance Mean self-reported chance Total wealth decile Source: ELSA, All 50 to SPA

Expectations of future work Mean self-reported chance Total wealth decile Source: ELSA, All men 50-59, all women 50-54

Expectations of living to age 75 - Men Total wealth decile Source: ELSA, All men 50 to SPA

Expected vs predicted income • Currently only have information on expectations of private pension income • Compare to our predictions of future pension income

Predicted and expected private pension income Predicted income Source: ELSA, All 50 to SPA with at least one private pension

Proportion under-/over-estimating Non-pension wealth quintile Source: ELSA, All 50 to SPA with at least one private pension

Summary • Wealth is unevenly distributed • Low wealth individuals have low expectations of… • Receiving an inheritance • Working at older ages • Surviving to age 75 • Some evidence that, on average, individuals over-estimate future private pension income

Prepared for Retirement? Identifying those at risk of having inadequate resources

How to define “adequacy”? • Adequacy versus optimality • Adequate for what? • To maintain a minimum living standard? • To maintain pre-retirement living standards?

A “poverty line” interpretation of adequacy • Sufficient income to avoid poverty • Many different benchmarks of poverty could be chosen • One possibility is to take the Pension Credit Guarantee level of income as a benchmark • £109.45 for singles/£167.05 for couples in 2005/6

An absolute income interpretation of adequacy Assumes probabilistic likelihood of working to SPA

Distribution of predicted retirement income

A relative income interpretation of adequacy • The standard of living implied by the PCG will be unacceptably low for some individuals • An alternative is to measure adequacy relative to current income • 67% net replacement rate • 80% net replacement rate • Pensions Commission benchmark

A relative income definition of adequacy Assumes probabilistic likelihood of working to SPA

Prepared for Retirement?