Measuring retirement savings adequacy. Developing a multi-pillar approach in the Netherlands
This paper investigates the adequacy of Dutch household retirement savings. To take account of the varying composition of pension savings across households, the paper analyzes not only public and occupational private pension rights, but also annuity insurances, housing wealth and private savings. This is important, since different forms of assets may act as substitutes for one another. In order to compare housing wealth and private savings with pension rights, we approximate imputed rent and annuitize wealth components. Replacement rates and absolute levels of pension annuities indicate to what extent households save adequately for retirement. Summed over all age- and socioeconomic groups, a median gross replacement rate of 83% and a net replacement rate of 101% are found. Public and occupational pensions each account for more than 35% of total pension annuities. Private non-housing assets account for 14% and imputed rental income from net housing wealth accounts for about 10%. If households were to deplete housing wealth, gross median replacement rates would increase by about 5%-points. Taking into account all components that provide income during retirement, 31% of all households face a gross replacement rate that is lower than 70% of current income. Assuming that a 70% gross replacement rate is the norm, pension income for these people can be said to be inadequate in financing retirement. Potentially vulnerable groups such as first-generation immigrants, single women and recipients of unemployment and disability benefits have relatively low replacement rates and low absolute levels of retirement income. Among self-employed households relatively low replacement rates are also found— but these are accompanied by high absolute levels of retirement income, although differences are large within this group. Conclusions regarding the adequacy of retirement savings are sensitive to different future scenarios, with young generations benefiting most from an optimistic scenario but also suffering more from a pessimistic scenario, compared to older generations.