Estimation of the impact of changes in the period used to calculate the regulatory base on new retirement pension amounts

Abstract

Based on a sample of new retirees in 2019, this article estimates the effect which the period considered in calculating the regulatory base has on the initial pension amount. In the analysis the initial pension amount for periods ranging between 15 and 35 years and the result of shortening that period to the most favourable contribution years are calculated. The results show that, within the range indicated, the average initial pension is a monotonically decreasing function of the number of years considered in calculating the regulatory base. Specifically, extending the calculation period from 15 to 25 years would be associated with a fall in the average initial pension of 5.0%, while extending it from 25 to 35 years would entail an additional reduction of 8.2%. Also, simultaneously extending the calculation period to 35 years and discarding the most unfavourable years to determine the regulatory base would help smooth the fall in the average initial pension. At the same time, this would reduce the heterogeneity of pensions among individuals (although the inequality would decline less than if the calculation period were limited to the 35 years preceding retirement). For instance, taking into consideration the 29 most favourable years within the 35 years before retirement would give an average pension similar to that resulting from considering the 25 years preceding retirement. Also, determining the regulatory base in this way would, on average, give rise to an increase in the initial pension benefit amounts of pensions below the median (in comparison with a scenario in which the regulatory base is calculated on the basis of the 25 years preceding retirement) and a fall in the initial benefit amounts of pensions in the fourth quartile of the distribution.