The Basic Idea
Traditional measures of poverty assess an individual’s current economic situation. They compare observed income or consumption with a minimum subsistence threshold (absolute poverty) or with the prevailing standard of living in society (relative poverty).
Intertemporal poverty introduces an additional dimension: time.
The question is not only:
“Are the resources available today sufficient?”
but also:
“Do the resources available today make it possible to maintain an adequate standard of living throughout the entire life cycle?”
In particular, the approach considers the sustainability of an individual’s economic well-being during retirement.
The Link with Hicksian Income
The approach draws on the definition of income proposed by John Hicks.
According to Hicks, income corresponds to the maximum amount that can be consumed during a period while maintaining the ability to consume in the future unchanged.
When there is a pension gap, part of current income cannot be regarded as fully available for consumption because it must be allocated to retirement savings.
We therefore define:
Sustainable Income = Net Income − Minimum Required Retirement Savings
This measure represents the income effectively available for consumption while remaining consistent with the preservation of future economic well-being.
How Minimum Required Retirement Savings Are Calculated
The procedure consists of four steps.
1. Estimating Expected Retirement Income
We start from current income and estimate expected labour income at retirement.
The expected pension replacement rate is then applied.
Expected Pension = Replacement Rate × Final Income
2. Defining the Retirement Income Target
We need to define what level of income should be considered adequate during retirement.
This leads to three possible concepts of intertemporal poverty.
a. Intertemporal Absolute Poverty
The question is:
“Will I have sufficient resources to meet my essential needs during retirement?”
The relevant benchmark is a minimum future consumption threshold.
Condition: Expected Pension + Private Retirement Income ≥ Future Minimum Threshold
If this inequality is not satisfied, the individual experiences intertemporal absolute poverty.
b. Intertemporal Relative Poverty
The question is:
“Will I have sufficient resources to avoid falling below the average economic standard of the future society?”
The relevant benchmark is linked to the median income of the future population.
Condition: Expected Pension + Private Retirement Income ≥ Future Relative Threshold
If this inequality is not satisfied, the individual experiences intertemporal relative poverty.
c. Intertemporal Individual Poverty
The question is:
“Will I be able to maintain a standard of living consistent with the one I built during my working life?”
The relevant benchmark is a percentage of final labour income. For example:
Target = 75% × Final Income
The condition is therefore:
Expected Pension + Private Retirement Income ≥ 75% × Final Income
If this inequality is not satisfied, the individual experiences intertemporal individual poverty.
This measure does not compare the individual with others, but with his or her own expected standard of living.
From the Pension Gap to the Required Capital
Once the retirement target has been identified, the annual pension gap is calculated:
Gap = Target − Expected Pension
The amount of capital required at retirement to finance this gap is then calculated.
The required capital depends on:
- the expected duration of retirement;
- the real rate of return on assets during retirement.
From Required Capital to Minimum Savings
The required capital is then translated into the annual savings needed during working life.
The result depends on:
- the number of years remaining until retirement;
- the real rate of return on investments;
- expected longevity.
This gives us the minimum required retirement savings.
Example: Average Worker and Intertemporal Individual Poverty
Consider an individual with the following characteristics:
- age: 30;
- gross income: €30,000;
- net income: approximately €23,000;
- real income growth: 1% per year;
- pension replacement rate: 59%;
- retirement income target: 75% of final income.
Applying the methodology gives:
- expected public pension: approximately €24,800 per year;
- retirement income target: approximately €31,600 per year;
- pension gap: approximately €6,700 per year;
- required capital: approximately €132,000;
- required savings: approximately €2,300 per year.
This is equivalent to approximately €190 per month.
Sustainable income therefore becomes:
€23,000 − €2,300 = €20,700 per year
or approximately €1,725 per month.
Example: Worker Close to the Minimum Threshold and Intertemporal Absolute Poverty
Consider an individual with:
- net income: €1,150 per month;
- expected public pension: approximately €11,450 per year;
- future minimum threshold: approximately €16,900 per year.
In this case, the pension gap is approximately €5,450 per year.
Assuming:
- retirement at age 64;
- life expectancy of 92 years;
- real return during the accumulation phase of 2%;
- real return during the decumulation phase of 1%;
the required savings amount to approximately:
€230 per month.
Sustainable income therefore becomes:
€1,150 − €230 = €920 per month.
The individual may appear today to be just above a minimum poverty threshold, while already being vulnerable from an intertemporal perspective.
Summary
Intertemporal poverty extends the traditional concept of poverty by introducing the time dimension.
The central idea is that part of current income must be allocated to ensuring future economic sustainability.
Economic well-being therefore depends not only on income observed today, but also on the ability to accumulate the resources required to maintain an adequate standard of living over time.