Public Pension Replacement Rates

Pension Plan Replacement Rates

Public Pension Replacement Rates

The portion of monthly pre-retirement income that will be replaced by monthly pension plan funds is called the pension plan replacement rate (Quadagno, 2011). In the United States, the majority of pre-retirement income replacement comes from Social Security payments (Quadagno, 2011). The actual replacement rate for wage earners with lower incomes is higher than for those who have had higher wages during their working years (Quadagno, 2011). But overall, wealthier recipients of Social Security payments still achieve higher income replacement (Quadagno, 2011). "By 2030, a worker who retires at age 62 will receive only 70% of the whole retirement benefit, and workers who want to receive the maximum benefit will have to wait until they reach age 67" (Quadagno, 2011, p. 10). How does this compare with the situation in other countries? Comparing prior earning replacement rates for Greece and the United States, for instance, shows that Greece 3rd on replacement rates and the U.S. ranks 26th (Quadagno, 2011).

Causes of Variance in Pension Plan Replacement Rates

The IKA_ETAM is Greek's pay-as-you-go (PAYGO) -- meaning an unfunded plan -- pension plan for the private sector. All figures in this paragraph are referenced from 2005 data. The pension schemes are defined benefit and reflect the contribution wages and the length of employment. Both employers and employees contribute to the pension plan at a rate of 13.33% and 6.67% of gross wages, respectively. In addition, the state, according to projects into 2030, will contribute an additional 1% of gross wages. A full pension is determined to be 35 service years and attainment of the age of 65, resulting in a replacement rate of 80%. For workers with average gross incomes after 40 service years, the net replacement rate id 114% and the gross replacement rate is about 100%.

Role of Pension Plan Replacement Rates in Greek Debt Burden

Politicians in Greece have considered public sector jobs and benefits to be an important avenue to support from the electorate (Nelson, et al., 2011).Greek labor unions are politically influential -- as they are in most countries -- and have been able to accomplish generous pension and wage agreements with the support of Greek political leaders (Nelson, et al., 2011). One outcome of this granting of favors has been that the Greek pension system has evolved into one of the most generous pension systems in Europe and the public payroll is enormous (Nelson, et al., 2011).Although pension reform has long been on the radar screen of reform economists in Greece, interest in pension reform has escalated with the Greek fiscal crisis (Nelson, et al., 2011).In 2008, a Greek pension reform law reduced the number of pension funds from a grand total of 133 funds (all related to the type of employment, such as farmers, civil servants, and state-owned banks) to 13 funds, consisting of five basic funds plus eight supplementary, smaller funds. However, the 2008 reforms appear to be lagging in implementation (Nelson, et al., 2011).Shortly on the heels of the global fiscal crisis in 2009, the Greek parliament determined to address pension reform by increasing the average age enabling access to retirement funds and to change the way that the pension benefits were being calculated (Nelson, et al., 2011). Even with the reform, pension fraud and contribution evasion may be difficult -- as in the past -- to detect and correct.