The problem facing European pension systems was articulated in surprisingly stark terms by a senior official at the European Commission at a meeting in Brussels recently. The issue was not couched in the regular Brussels-speak – indeed, it would be hard to have been more explicit.
“We need more people,” said Antonio Cabral, deputy director general of the Directorate General for Economic and Financial Affairs at the European Commission. “We need more people want to work. We need people wanting to work more and we need people producing more.”
Cabral, who job involves, overseeing member states’ economies, argues that pensions are now a much more ‘mainstream’ item on the European economic agenda. He points to the much-maligned Stability and Growth Pact – and the fact that the whole issue of pension was now a central feature within the terms the pact. Under the pact, member states have to submit fiscal plans – which nowadays include pension reform plans. Those plans are then open to scrutiny by the Commission.
“It is now part of the regular process of surveillance,” he told delegates to a conference organised by the Centre for European Policy Studies and the US retirement action group AARP. The event was entitled ‘A Balancing Act: Achieving Adequacy and Sustainability in Retirement Income Reform’.
“Each member state has to present fiscal intentions – the assessment of pensions is integral to this.” Cabral says EU member states are now facing “peer pressure towards pension reform”. “In any EU state government finances cannot be considered sustainable if nothing is done.”
Cabral says that the size of member states’ public sector is also important in terms of pension sustainability going forwards. Another element, of course, was the impact of the migration factor on demographic trends.
And Cabral is equally stark in his assessment of the impact of demographic ageing on the wider European economy. “Population ageing,” he says, “will lead to a lowering of growth potential”. Coupled with a deterioration in living standards, Cabral sees a combination of events that “leaves us with a picture that is not extremely bright”.
Cabral’s point that pensions are now more central at the European level was borne out by Theo Langejan, chairman of the Social Protection Committee of the EU.
“Over the past three years, the EU has developed a much closer cooperation among Members States on pension issues,” Langejan said. “This policy area used to be completely out of bounds for the EU, and there is no intention to shift responsibilities from the member states to the European Union.” But Langejan said there is now a consensus of opinion calling for closer cooperation.
He cited the “realisation that we face similar challenges and the we therefore have much to learn from each other”. One country’s success or failure can have a knock-on effect to its neighbours.
And he pointed to the fact that “we share similar values as regards the social protection of older people – something which is easily forgotten in view of the huge diversity of pension systems across the enlarged European Union”.
“What is the point of achieving financial sustainability by reducing pensions to such a level that we have once again problems of widespread poverty in old age?” he asked. He argued that pensions could only be adequate in the long run “if they are financed in a sound way”.
“We could not have public borrowing at a level of five or 10% of GDP every year to finance pensions.”
Langejan acknowledged that different solutions exist – but maintained the importance of solidarity in dealing with the issue. “For a majority of people, we can certainly create the conditions that would allow them to find the right response to the challenge of ageing. Solidarity in pension systems will, however, remain important for those who are unable to earn sufficient incomes and pension rights.”
He argued that state provision, on the pay-as-you-go model, is key. “States are the only institutions that can survive the major upheaval that Europe experiences over the past century – or at least states can repair the consequences.” Langejan argued in terms of historical perspective. “History matters – pay-as-you-go is a fair way of sharing resources in a growing economy.
“Public pension schemes, finally, have the advantage of being cheap to run. They can be set up for the entire population, there are no marketing costs, there is no need to tailor pension products to individual needs and asset management is cheap because there are not many assets to be managed.
“In fact, contributions to a pay-as-you-go pension scheme are like an investment in the future labour force of a country: the return depends on future employment and productivity across the economy. It is difficult to achieve a wider risk spread within a given country than through a pay-as you go pension scheme.”
Edward Palmer, head of research at Sweden’s national social insurance board, put forward the Swedish experience of pension reform. One problem, he noted, was that not even experts can agree. “Even asking the experts gives you two answers at least,” he observed. “It’s part of the democratic process and its part of the problem. In Sweden we had a political consensus.”
It was this consensus, as well as informed discussion, Palmer argued, that was the reason Sweden’s reform went through. It was important that politicians, both in government and opposition, bought into the basic ideas so that the reform was not turned around with a change of government. Palmer was clear about what a pension system is for. “I still think the major justification for a pension system is to prevent poverty in old age.”
Kent Weaver, professor of public policy and government at Georgetown University in the US, thought pension systems were too different between countries for any single model to develop. “The likelihood of a common model for pension reform in the future is relatively slim.” He saw “common challenges - but big differences”.
Weaver has identified four pension approaches. First there is the traditional Bismarkian system, followed by the Bismarkian ‘lite’ seen in the US and Canada. Next, the new notional defined contribution system seen in countries such as Sweden, Italy and Latvia. Then there are the mixed systems found in the UK, Denmark, Switzerland and the Netherlands.
And he sees three basic responses to reform: retrench, refine, restructure. Each system had its own idiosyncrasies and political constrains on reform, which he termed “veto points”.
Weaver disagreed that a political consensus was important. Indeed he felt it was key to take the politics away altogether. He said: “What is needed are mechanisms to depoliticise pensions decision-making.”
As CEPS director Daniel Gros and Nancy Leamond of the AARP acknowledged in a commentary: “Policy decisions may well prove more difficult in Europe than in the US.”
“The fierce resistance to any modification of status quo in a number of countries, notably France and Italy and, to some extent, Germany, indicates that it will require a difficult balancing act to achieve compromise among conflicting interests and perceptions.”
They argued that both governments and individuals would have to adapt to ageing demographics. “This entails unlocking the productive potential of millions of capable and trainable employees.”
Whatever the disagreements over the specific ways to target pension reform, perhaps the simple fact that the topic – as the Commission’s Cabral argues - is now so high up the agenda is in itself just cause for celebration. And with the Swedes leading the way, showing the rest of the continent and the world how to achieve reform though consensus, maybe there is hope for us all yet going forward.

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