Background
In retirement and pension plans, the average earnings scheme is designed to calculate an individual’s pension based on their average salary over their employment period, rather than the final or highest salary.
Historical Context
The notion of average earnings schemes emerged as a means to provide a fair and sustainable method for calculating pension benefits. It was introduced as an alternative to final salary pension plans, which often placed a considerable financial burden on employers due to their reliance on the employee’s highest or final earnings.
Definitions and Concepts
An average earnings scheme, also known as a career average scheme, is defined as:
- Average Earnings Scheme: A pension plan in which an individual’s retirement benefits are calculated based on the average of their earnings throughout their entire career rather than their final or highest salary.
Major Analytical Frameworks
Classical Economics
In the classical view, average earnings schemes align with the principles of rational, incremental and cumulative rewards over a working life, promoting consistent saving and income distribution over time.
Neoclassical Economics
Neoclassical frameworks would assess average earnings schemes in terms of efficiency and market equilibrium, examining how such pension plans influence labor market behavior, savings rates, and employee mobility.
Keynesian Economics
From a Keynesian perspective, average earnings schemes can be seen as a stabilizing force for aggregate demand, ensuring that retirees have a steady income, which helps maintain consumption and counteract deflationary pressures in the economy.
Marxian Economics
Marxian analysis would critique average earnings schemes, considering them as mechanisms that serve to perpetuate labor power and maintain social order, reflecting deep structural inequalities within capitalist systems.
Institutional Economics
Institutional economists would focus on how average earnings schemes are shaped by, and shape, the institutional framework of labor markets, employer-employee relationships, and governmental policy.
Behavioral Economics
Behavioral economists examine how average earnings schemes affect the financial decisions of workers, addressing issues like pension plan participation, perceived fairness, and psychological impacts of different pension calculations.
Post-Keynesian Economics
Post-Keynesians would support average earnings schemes for their redistributive potential and role in stabilizing long-term socioeconomic wellbeing, critical in promoting social equity.
Austrian Economics
Austrian economists may oppose centralized average earnings schemes, arguing for the superiority of market-determined, individualized solutions over uniform pension arrangements.
Development Economics
In developing economies, average earnings schemes can be particularly beneficial for providing a stable income post-retirement, encouraging formal employment relations and financial systems development.
Monetarism
Monetarists might view average earnings schemes in the context of their impact on monetary supply and inflation, debating their sustainability and effect on the national savings rate.
Comparative Analysis
When compared to final salary schemes, average earnings schemes offer a more equitable approach to pension calculation, reducing the incentive for ‘pension spiking’ practices and placing young and mid-career employees on the same footing. They generally benefit employees with consistent earnings over time and are financially more sustainable for employers.
Case Studies
- The Netherlands: Known for its robust pension system, the incorporation of average earnings schemes within various occupational plans has been instrumental in providing sustainable retirement solutions.
- Public Sector Pensions in the UK: The shift from final salary to career average pension schemes in public service has been deeply analyzed for its financial viability and impact on workforce morale.
Suggested Books for Further Studies
- Pensions: An International Perspective by Nicholas Barr
- The Pension Trustee’s Handbook by Robin Ellison
- Understanding Pensions by Martin Sullivan
Related Terms with Definitions
- Final Salary Scheme: A pension plan in which retirement benefits are based on the employee’s salary at the end of their career.
- Defined Benefit Plan: A type of pension plan where the benefits are calculated on factors like salary history and duration of employment.
- Defined Contribution Plan: A plan where retirement benefits are based on the amount of money contributed and the investment performance of those contributions.
- Pension Spiking: The practice of artificially inflating an employee’s salary close to retirement to boost pension benefits.
Hope this entry clears up the term “average earnings scheme” with sufficient context and examples from economic theory!
