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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

fuller-mccormick
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Prepared for Retirement?

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

  2. Prepared for Retirement? Introduction

  3. 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

  4. 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

  5. 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?

  6. 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)

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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?

  12. Prepared for Retirement? Distribution of retirement resources and expectations

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

  14. Pension wealth • State pension wealth • Private pension wealth

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

  16. 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)

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

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

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

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

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

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

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

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

  25. 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

  26. 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

  27. 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

  28. “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

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

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

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

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

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

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

  35. 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

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

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

  38. 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

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

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

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

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

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

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

  45. Distribution of predicted retirement income

  46. Distribution of predicted retirement income

  47. Distribution of predicted retirement income

  48. 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

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

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

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