Background
A career average scheme, also known as a career average revalued earnings (CARE) pension scheme, is a type of defined benefit pension plan where the benefits are based on the average salary earned over the entire period of membership.
Historical Context
The concept of defined benefit pensions, where the retirement benefit is predetermined based on salary and years of service, has been a significant aspect of retirement planning. The career average scheme aimed to mitigate some of the challenges and sustainability concerns associated with final salary pension schemes, often seen in periods of salary inflation.
Definitions and Concepts
A career average scheme calculates the pension based on an average of the salaries that a member has earned during their career, as opposed to only considering the final or best years of earnings. This reduces the risks to both the employer and employee by smoothing out effects of pay variations over time.
Major Analytical Frameworks
Various economic theories provide frameworks for analyzing career average schemes and their impact on retirement and savings behavior.
Classical Economics
Classical economics would view the career average scheme in terms of its role in helping individuals save for their retirement, thereby ensuring a stable income post-employment and contributing to overall economic stability.
Neoclassical Economics
Neoclassical frameworks might analyze how career average schemes create incentives for savings and labor force participation, considering the impact of such pension plans on individual utility maximization over time.
Keynesian Economics
A Keynesian perspective would examine how career average pensions influence aggregate demand through the savings and consumption patterns of retirees, potentially affecting macroeconomic stability.
Marxian Economics
From a Marxian standpoint, career average schemes could be critiqued regarding how they redistribute wealth within capitalist systems, particularly in the dynamics of labor value and wage disparities over a worker’s career.
Institutional Economics
Institutional economics would focus on the role of career average schemes within broader societal structures, including regulations, social norms, and the institutional framework of the pension system.
Behavioral Economics
Behavioral economics would assess how these schemes affect decision-making, looking at elements like loss aversion, procrastination in retirement planning, and biases in estimating future benefits.
Post-Keynesian Economics
Post-Keynesian analysis may explore the long-term impacts of career average schemes on economic variables like aggregate investment, income distribution, and the stability of pension funds.
Austrian Economics
Austrian economics might critique the prescriptive nature of such schemes, emphasizing the importance of individual choice and market-determined pensions arrangements versus state or employer-determined plans.
Development Economics
In development economics, career average schemes can be evaluated for their role in promoting social security in low-and-middle-income countries, contributing to stable labor markets and improved living standards for retirees.
Monetarism
Monetarists might look at the potential inflationary impacts of career average pensions and how these can influence monetary policy decisions, particularly those related to savings and consumption trends.
Comparative Analysis
When compared with other forms of pension schemes—like final salary schemes or defined contribution plans—the career average scheme presents a balanced, long-term approach to retirement benefits that evenly distributes financial risk and benefit over an individual’s career lifespan.
Case Studies
Detailed analysis of specific occupational and public pension systems adopting career average schemes along with their economic and social outcomes would offer deeper insights.
Suggested Books for Further Studies
- “Pension Systems and Retirement Incomes across OECD Countries” by Nicholas Barr and Peter Diamond
- “The Future of Public Employee Retirement Systems” edited by Olivia S. Mitchell and Gary Anderson
- “Reforming Pensions: Principles and Policy Choices” by Nicholas Barr
Related Terms with Definitions
- Final Salary Scheme: A pension plan where benefits are calculated based on the salary an employee earns at the end of their career.
- Defined Benefit Pension Plan: A pension plan where the benefits on retirement are predetermined and guaranteed, usually based on salary and years of service.
- Defined Contribution Plan: A retirement plan where contributions are defined and the benefits depend on the investment performance of those contributions.
- Pension Revaluation: An adjustment of pension benefits to account for changes such as inflation, ensuring that the value does not diminish over time.
By understanding these aspects, individuals can better comprehend how different pension formats function, prepare for retirement planning, and evaluate the advantages and limitations of career average schemes in the context of broader economic systems.
