Fearing Crisis, EU Calls for Pension Reforms

December 17, 2002 (PLANSPONSOR.com) - With a pension crisis looming in some member countries, the European Union Commission is now pushing reforms, such as raising the retirement age and encouraging the creation of investment funds.

According to a Dow Jones news report, the commission warned about the consequences of an aging population in its first comprehensive evaluation of all 15 EU pension systems where four workers now pay for each retiree. By 2050, it will be only two, Dow Jones said.

“This report will help member states to push forward the reforms necessary to secure adequate and sustainable pensions over the long term,” Social Affairs Commissioner Anna Diamantopoulou said, according to Dow Jones.

A Demographic Time Bomb

The demographic time bomb will undermine traditional state pension systems. Under the state pay-as-you-go systems, contributions made by workers aren’t invested. Instead, they are used immediately to pay for current retirees, Dow Jones said.

“Our job is to find ways of preventing these demographic developments translating into a pension disaster, either in the form of poverty among older people, or in the form of unbearably high contribution and tax rates,” the EU report said, according to Dow Jones.

Since many governments are already running public deficits, the Commission said the private sector must be encouraged to participate in pension reform.

The EU’s three biggest economies, Germany, France and Italy, face the largest challenges, according to Dow Jones. All three rely on state-run pension schemes. The Netherlands and the UK, which make more use of company and individual pension plans, are in much better shape.

France is Worst Off

France faces the most immediate crisis. Its overall debt is close to the EU limit of 60% of gross domestic product and it will probably break the 3% of GDP deficit limit next year.

The extensive state pension system leaves little room for funded company or private pension plans. France needs to increase its employment rate, particularly among older people, the commission said. Only 31% of the people between 55 and 64 are working. The average retirement age is 58.7 years, Dow Jones said.

Germany isn’t faring much better. Despite some reforms last year, “major financial challenges persist,” the commission said. The government made efforts to discourage early retirement, but “this can’t be relied upon to guarantee the financial balance of the pension system,” it added.

Italy started major reform in the 1990s designed to reduce the pension levels. But contributions to state pensions still make up 32.7% of an employee’s salary.

On the other end of the scale are countries like the Netherlands and the UK Their public finances are sound and governments rely more on pension plans that invest contributions in securities. The Dutch company pension plans are more developed than anywhere else in the EU This is thanks to agreements between unions and employees that ensure mandatory coverage of at least 91% of all employees in 2001.

In the UK, with low debt levels of around 37% and small deficits, future sustainability of pensions is “well under control,” the commission said.