Estimating, and Interpreting, Retirement Income Replacement Rates

Abstract

Longitudinal data are used to estimate retirement income replacement rates (RRs) of employees in Ireland who transitioned into retirement between 2010 and 2016. The median RR is estimated at 47 per cent, meaning that the majority of the retirees replaced less than half of their pre-retirement earnings with pension income. The distribution of RRs is highly skewed, with a mean of 73 per cent. The mean value seems high relative to stated policy goals, but the estimate is driven partly by very high RRs at the lower end of the earnings distribution. When a more comprehensive measure of income – incorporating pre-retirement pension income, post-retirement labour earnings and social welfare payments – is used, the mean RR falls to 52 per cent. The findings highlight the need for understanding the distribution of replacement rates and leads to a question as to whether policy goals in the areas of pension adequacy should be set with respect to income or consumption levels as opposed to RRs.