The European Pension Challenge

Dorian Kronenwerth, 29 October 2014

pension systemsPension schemes objectives vary depending on political context and cultures. Some aim to reduce poverty among the elderly in society (e.g. the UK), whereas others reward pensioners relative to what they contributed over the years (e.g. Sweden, the Netherlands). However, public pension expenditure is high and tends to rise even more.  This constitutes a challenge for the European states and requires reform. What follows is a brief analysis of the factors involved and what can be done to transform this challenge into a success. 

Pension systems involve the transfer of resources to pensioners (who consume but do not produce) from workers (who produce more than they consume)[1]. This system worked for a long time, but the growing economies of the old days do no longer exist. Life expectancy is increasing and fertility rates are falling. The contributions towards the pension fund do not suffice anymore and the state needs to intervene with additional payments. Currently 18% of Sweden’s population is aged over 65 and receiving pension payments – by 2030 the number is expected to rise to 30%[2]. This is a common trend across many European countries. Back in 1991 in Germany, four workers supported one pensioner, whereas in 2030 only two workers are expected to support one pensioner[3]. Hence, the welfare state, which needs a growing economy, needs to reform in order to survive.

dependency

The  challenge for Europe is how to preserve prosperity and social services on the one hand, but to remain competitive and not to be indebted and drown in illiquidity, on the other hand. One solution would involve adjusting the span of pension systems so as to cover not more than the last 15 years of life (currently 18 years for men and 23.5 for women)[4], to reduce generosity of the systems to merely prevent old age poverty and to support people to work longer[5].participation rate

An alternative solution would be the diversification of retirement income, a mix of occupational and private pension savings. Besides more and different ways of saving, creating job opportunities for the elderly seems a straightforward solution through lifelong learning and workplaces suited to older workers as well as a more flexible legal framework – perhaps combining a part-time job with a partial pension. Additionally the World Bank suggests such a multi-pillar system to foster diversification, sharing risk among country, companies and individuals. The Netherlands and Germany incentivise their citizens to make private arrangements through tax reductions and Hungary nationalised occupational pension schemes to shift its system[6]. Also increasing immigration and reducing informal labour is part of the solution.

In any case, there is no “one-size-fits-all” solution. If people are willing to work as long as they feel healthy, the pension system can continue to work. Alternatively a more basic benefit needs to be considered. But in either case it must be a long-term strategic decision taken by a long-sighted government grounded in broad societal consensus to be followed for decades into the future.

 

[1] IMF, A. Turner, http://www.imf.org/external/pubs/ft/fandd/2006/09/turner.htm

[2] Swedish Government, On Pensions, https://sweden.se/society/elderly-care-in-sweden/ (Accessed on: 5 September 2014)

[3] Tagesschau, Information on Pensions, http://www.tagesschau.de/inland/faqrente102.html

[4] World Bank, 2014, http://www.worldbank.org/en/news/feature/2014/02/21/changing-demographics-call-for-urgent-pension-reforms-in-europe-and-central-asia (Accessed on: 5 September 2014)

[5] World Bank, http://www.worldbank.org/en/news/feature/2014/02/21/changing-demographics-call-for-urgent-pension-reforms-in-europe-and-central-asia

[6] Ibid, p.1,

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