Thursday, September 25, 2003

The Economist - State Pensions in Europe

In light of my recent comments on the need for pension reform in Europe, I find the publication of the following article quite timely: | State pensions in Europe

Work longer, have more babies

Sep 25th 2003
From The Economist print edition

Europe's pensions crisis won't go away. Governments need to do more, and voters need to accept changes

EUROPE is currently witnessing the slow-motion explosion of the most predictable economic and social time-bomb in its history. As life expectancy began to increase quickly in the second half of the 20th century and fertility began to decline in the 1970s, the foundations of Europe's generous state-pension systems began slowly to crumble. These are pay-as-you-go schemes that force today's workers to finance yesterday's workers' pensions, based on the assumption that workers hugely outnumber retirees. But this has not been true for at least two decades. The current worker-pensioner ratio in Europe has fallen to about three workers for each pensioner, and it looks set to fall to a mere three workers for every two pensioners within 30 years. Most European governments have responded to this looming crisis only with the kind of timid tinkering that does little more than shift the problem to their successors (see article).

This is precisely what the Italian government is about to do. Silvio Berlusconi's pension reform, unveiled this week, will come into effect only in 2008 when the current prime minister is unlikely still to be occupying the Palazzo Chigi in Rome. Instead of speeding up an earlier reform, Mr Berlusconi is merely fiddling with so-called “seniority” pensions that allow workers to retire at 57 if they have been in work for 35 years. Rather than abolishing these next year, as expected, he will continue them until 2008, and offer workers a fat bonus if they carry on working despite being eligible for what is now widely viewed as an over-generous perk.

Mr Berlusconi's loss of courage is typical of similar half-hearted efforts elsewhere. Germany is currently discussing an increase by monthly increments of the retirement age from 65 to 67 between 2011 and 2035, but even this minimal change is proving too much for the left wing of the ruling Social Democratic Party. France passed a law this year that will oblige its public-sector employees to work as long as those employed in the private sector in order to qualify for a full state pension, a welcome reform that should nevertheless have happened years ago. Austria's government dared to push through a rather more ambitious reform this year, but tiny Austria's spending on pensions is also of Italian proportions.

There is little mystery about why governments have been so pusillanimous. Changes to public pension schemes are extremely unpopular with workers and voters. In France and Italy, trade unions have often brought their countries to a standstill at the slightest hint of any change to pensions. Mr Berlusconi's attempts at pension reform played a big part in the downfall of his previous government in 1994.

And yet sooner rather than later, European governments, as well as the voters whom they are supposed to serve, will have to face the unpalatable truth that their current public pension schemes are not sustainable. Addressing that crisis will be painful for everyone, and no single remedy will be enough, but there are measures which both voters and governments should pursue—with some urgency.

First, governments will have to act much more boldly to reduce the scope of the core pay-as-you-go public pension system. Second, employees, public or private, should be encouraged instead to channel their savings into private retirement accounts, either administered by employers or (even better) run directly by fund-management firms, thus taking responsibility for their own retirements. If encouragement does not work, such private savings may have to be made compulsory. Third, the state retirement age should be scrapped, because a fixed pension age makes little sense either for privately-funded pension schemes, which should be encouraged, or for public schemes. Alternatively, or as well, many European countries will have to do something to address the effects of their declining birth rates in order to redress the imbalance between workers and pensioners.

I've emphasized the bit on abolition of a fixed retirement age because it is precisely what I advocated on here a few days ago. I don't see that there's any way to solve this issue without adopting such a remedy, as the scale of population growth required to sustain an adequately high dependency ratio - whether the source be immigration or a new baby boom - would simply be too great to be acceptable; in any case, it would only stave off the inevitable for a while, as all population growth has to slow down at some point, lest we end up all squashed together like sardines. The fiction that it is possible to work for a set number of years, retire, and then enjoy another 20 to 30 years of well-remunerated idleness, is one that will die a hard death, but die it must.