Pensions in Europe

Description of Pensions

The Concise Encyclopedia of the European Union describes pensions in the following terms: [1] Most state pensions in Europe are on a pay-as-you-go basis, whereby current payments are met from contributions, tax and other current income (see more in this European encyclopedia). As populations age, fewer wage-earners will be supporting more people in retirement and the affordability of state pensions will deteriorate, leaving governments with harsh options: to reduce benefits; to increase contributionsor taxes; or to raise the retirement age (see more in this European encyclopedia). The exception is the UK, where state pensions are extensively supplemented by private funded schemes – the value of funds set aside and invested to meet future British pension commitments exceeds that of all the other EU member countries combined.

It has been estimated that if the pension obligations of Europe’s major economies were to be fully funded, it would cost Germany, France and Italy the equivalent of about 100% of each country’s GDP, whereas the cost to the UKwould be under 20%. This hidden liability is known as the net present value of underfunded pensions. Although the actuarial assumptions and methods of calculation differ slightly from one source to another, the order of magnitude is broadly agreed by the OECD, the International Monetary Fund and the European Commission. Another way of expressing the same deficiency is to say that Germany and France should be allocating about 3% more of their GDP each year for pension provision if they are to meet, without extra borrowing, the promises of generous index-linked retirement benefits given to voters during the last 30 years.

The size of the shortfall is such that if it had been included in the debt calculations used to judge which large European countries qualified on a sustainable basis for the single currency, only the UK would have passed the test. The problem is containable for a few more years, but by 2005 it will worsen and after 2010, when the baby-boom generation retires, EU member states may not be able to afford their pension commitments. Some UKEurosceptics have expressed the fear that at that stage a unified European balance sheet or tax harmonisation might be invoked to make the UK pay more than its fair share, despite the clause in the Maastricht Treaty shielding countries from being forced to bail each other out.

The terms of pensions in Europe inhibit the mobility of labour by depriving employees of their acquired rights when they cross borders, a feature which is contrary to the principles of the Treaty of Rome and an impediment to the single market. The Commission’s idea of a portability Directive appears well conceived. It has, however, been blocked by countries which regard pensionsas a loyalty bonus rather than an independent entitlement, still less an adjunct to flexible markets.


Notas y References

  1. Based on the book “A Concise Encyclopedia of the European Union from Aachen to Zollverein”, by Rodney Leach (Profile Books; London)

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