How accurately does 70% final employment earnings replacement measure retirement income (in)adequacy? : introducing the living standards replacement rate (LSRR)

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<title>How accurately does 70% final employment earnings replacement measure retirement income (in)adequacy?</title>
<subTitle>: introducing the living standards replacement rate (LSRR)</subTitle>
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<namePart>Osberg, Lars</namePart>
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<namePart>Moore, Kevin D.</namePart>
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<abstract displayLabel="Summary">Despite increasing skepticism, the most dominant measure of retirement income adequacy by financial planners, pensions plan advisors, academics and public policy makers is the final employment earnings replacement rate, where 70% is considered the right target to ensure living standards remain at approximately the same level after retirement. Using Statistics Canada's LifePaths dynamic population micro-simulation model, this paper asks whether those individuals from the 19511958 Canadian birth cohort who attain roughly a 70% final employment earnings replacement rate (as conventionally measured) at retirement do, in fact, achieve approximate continuity in their living standards. We find that the conventional final earnings replacement rate measure has little predictive value for living standards continuity between working-life and retirement. The primary reason is that employment earnings in a single year is not a reliable representation of a worker's standard of living  it relies on an inadequate pre-retirement measurement period, does not incorporate important components of consumption sources (such as home equity), and ignores household size (particularly children). As a result, we find that the correlation between the conventional earnings replacement rate and actual living standards continuity is relatively low (0.11). The paper therefore suggests an alternative metric for assessing howwell a worker's living standard is maintained after retirement  i.e., the Living Standards Replacement Rate, or the LSRR. The LSRR provides a more accurate, understandable and consistent measure of retirement income adequacy.</abstract>
<note type="statement of responsibility">Bonnie-Jeanne MacDonald, Lars Osberg and Kevin D. Moore</note>
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<title>Astin bulletin</title>
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<publisher>Belgium : ASTIN and AFIR Sections of the International Actuarial Association</publisher>
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<identifier type="issn">0515-0361</identifier>
<identifier type="local">MAP20077000420</identifier>
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<text>01/09/2016 Volumen 46 Número 3 - septiembre 2016 , p. 627-676</text>
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