Guide to Europe’s pension woes

Published by rudy Date posted on July 3, 2009

Who is going to pay for the retirement of future generations? Most European countries face the same difficulty, amid ageing populations and low birth rates.

Italy’s budget crisis makes pension reform especially pressing for Prime Minister Romano Prodi, but France, Germany and the UK have also announced ambitious plans to overhaul pensions.

The big stock market losses have fuelled fears about the future value of pensions.

BBC correspondents in Europe examine the challenges EU members face.


Italy’s hitherto generous state pension scheme faces bankruptcy within the next decade unless some radical reforms are enacted soon.

Italy’s state pension fund will shortly have to pay out to retirees more than it receives each year in contributions from an ever decreasing national workforce.

The governor of the Bank of Italy, Mario Draghi, put the problem bluntly recently.

Today, the number of Italians over 60 is equivalent to 42% of the working population, he said. That figure will reach 53% by 2020.

Unless the government gets its pension accounts quickly into order, young people entering the workforce today will have to pay contributions amounting to 127% of their salaries over the next 15 years in order to receive the same benefits current pensioners receive.

The official retirement age at present for women is 55, for men 57 plus a minimum of 35 years of pension contributions.

Under the latest reform scheme agreed last month by the centre-left coalition headed by Romano Prodi, the official retirement age will be progressively raised each year until 2014.

Pension reform has been a major stumbling block for Italian governments during two decades.

In 1994 Silvio Berlusconi’s first coalition fell after less than a year in office because of massive protests against his plan to prop up the already failing state pension scheme.

During his second much longer term as prime minister which ended in 2006, he managed to push through a reform scheme under which the retirement age would be raised to 60 by 2009 and workers would be encouraged to take out supplementary private pension schemes.

Once Mr Prodi came to office, the former Communists and the unions managed to force a backtrack, despite warnings that the whole state pension system was in jeopardy.


During the French election, Nicolas Sarkozy went on the campaign trail to Metz in eastern France where he visited factories and former mines.
The theme of his speech there was the same as the theme of all his speeches – that France had to work harder to earn more pay:

“If you think 53 makes you old enough to retire,” yelled Mr Sarkozy from his podium (who had himself just turned 53), “then fine, go ahead and retire. But don’t expect the state to pay for it.”

He is determined to overhaul France’s generous welfare system and cut back on state pensions, which are crippling the country’s finances.

The state coffers are badly in the red. Public debt stands at 67% – five times its level in 1980. Including gross pension liabilities raises the public debt to 120% of GDP.

One in four people are employed by the public sector and there are simply not enough people working to fund the pensions of those who are retired.

France has one of the lowest labour rates in the world with just 41% of the adult population working and extremely few workers in the 55-65 age group still employed.

And despite having the highest birth rate in Europe, France, like other EU countries, faces the challenge of an ageing population.

France’s 2003 pension reform gave priority to extending people’s working lives, to finance pensions in the long term. The retirement age is now 65 for certain groups and public sector workers must work for 40 years rather than 37.5 to qualify for full pension rights.

In September, President Sarkozy intends to push things further – reforming the “special pensions” that certain public sector workers currently enjoy. Such schemes allow transport workers and others full pension entitlements even if they retire early.

But the unions are not likely to accept change without protest. Previous attempts at reforming state workers’ pensions have ended in mass strikes which have brought the country to a standstill and have toppled governments.


The UK is going through the biggest pension shake-up in 50 years.

In response to rising life expectancy and falling levels of pension saving, the Labour government has overhauled the state pension system.
As a result, the age at which Britons can claim the state pension will rise gradually from 65 to 68 over the next three decades.

In return for a delayed state pension, payments will be increased in line with average earnings rather than inflation.

Generally earnings rise faster than prices, so, in effect, the UK state pension will become more generous.

In an attempt to improve the state pension prospects of women – who often take time out of work to look after children – the number of years of National Insurance Contributions (NICS) it takes to earn a full state pension will be cut from 44 to 30.

This will mean millions more people, mainly women, will be entitled to a full state pension.

The government has also tried to tackle the issue of vanishing workplace pension provision, as firms move to cut staff pensions.

From 2012, at the earliest, workers who do not currently pay into a work pension will be automatically enrolled into a state-sponsored Personal Accounts pension scheme.

There has been a surprising degree of agreement over the UK government’s plans for pensions.

Opposition parties have agreed with the broad thrust of the reforms.

The Conservatives are happy that the reforms will not cost much extra cash; mainly because of the later state pension age.

The Liberal Democrats have welcomed the focus on women’s’ pensions.

Meanwhile, the unions have been brought on board, as lucrative public sector pensions schemes in local and central government have been largely ring-fenced.

They are also pleased that employers will be compelled to contribute into their employers’ Personal Accounts scheme once it is up and running.

But the pension settlement merely aims to hold things as they are. The UK still has an ageing population and it will become difficult to pay for pensions and long-term care for the elderly.

The current high levels of immigration may prove a saving grace, however. An influx of young people will address the balance between the number of workers and the retired.

Ultimately, this could prove a more important development than the present round of pension reforms.


Germany has one of the lowest birth rates in Europe, and at the same time, people are living longer. Recently, the pensions debate has become a political hot potato.

In March, the German parliament voted to raise the retirement age from 65 to 67 as part of a reform programme aimed at tackling rapid population ageing and spiralling pension costs.

The government is hoping that by keeping people in jobs longer, it will reduce the burden on the state pension fund.

But the decision has been heavily criticised by trade unions and groups representing Germany’s 20 million pensioners.

Such was the level of public anger that many demonstrations were staged against the government’s plans in Berlin and other German cities.

The head of the DGB trade union federation, Michael Sommer, said the new law was tantamount to lowering retirement benefits.

Opposition politicians argued that the changes would lead to higher unemployment and increased pensioner poverty.

Germany currently has one of the highest levels of public spending on pensions in the 30 countries of the OECD (Organisation for Economic Co-operation and Development).

The system provides a high level of cover, but it is widely believed to be unaffordable in the long term.

Most Germans stop working on average at the age of 63. Critics say it is still too easy for workers to take early retirement and they claim that many companies encourage early retirement schemes.

Given growing concerns over the demographic time-bomb, some pensioner groups have argued that those people retiring now are receiving state pension benefits which are around 10% less than they were in the past.

According to some surveys, one in three pensioners from 2030 will not be able to make ends meet if they rely on their normal pension scheme.


With Ireland’s property prices having soared over the past decade (though they have cooled down in recent months), many Irish people have seen bricks and mortar as a smart way of investing for their retirement.

Buying houses overseas has also been hugely popular, as Ireland’s booming economy has left many people with larger disposable incomes and opportunities to invest.

While pension provision has not become the political issue it is in the UK, for example, there is debate here about future pension requirements and policies.

Ireland’s workforce has grown rapidly over the past 10 years or so, as the economy has grown, although with a younger population than the EU average Ireland may not have the immediate needs and worries of some European counterparts, where the workforce is closer to retirement.

At present the state pension for a worker who retires at 65 is about 200 euros (£135), though the current government says it will raise that significantly over the next parliament.

About half of the working population of two million people also have private or occupational pensions which will eventually top up what they are due from the state on retirement.

Many of those are in public sector jobs. In the private sector, one in three workers are putting something aside for later life in a private pension.

Some here believe that figure needs to rise significantly to ensure people’s financial security.


Hungary’s population is ageing – and dying – fast.

Parallel to low fertility rates, the country is set to lose 8% of its population between 2000 and 2025, according to the latest UN figures.

Only 60% of working age Hungarians actually work.

The pension funding crisis, already bad enough, would be far worse were it not for the poor health of the population – many men in particular die soon after, or even before, reaching retirement age.

The last major reform in 1997 established a system of private pension funds, parallel to that of the state.

They are especially aimed at new employees coming onto the labour market. By the end of 1999, two million people had joined one.

But private funds have not performed as well as many hoped. Experts calculated that over the past year, 150,000 employees would receive lower pensions than they would have with the state fund.

Hardest hit are those in the army and police expecting to take early retirement. The Economy Minister, Janos Veres, ruled out any compensation for them, saying the state was not responsible.

Pension reforms have already been sketched out in the Socialist-Liberal government’s convergence programme, which aims to make it possible for Hungary to introduce the euro by 2014.

This allows for a gradual increase in retirement age until 2009, and stricter conditions for early retirement.

An expert roundtable is seeking cross-party agreement on pensions. Its first conclusions are expected in September, but the final conclusions only at the end of the year.

A new pension reform is likely to be launched early in 2008. One option is to decouple pensions from wage increases, and link them solely to inflation – now running at nearly 9% in Hungary.

Another is to boost private funds, at the cost of the state pension fund.


Spain’s pension system has been in a state of almost continuous reform since the transition to democracy during the late 1970s.

Radical change – for example privatisation – is off the current government’s agenda but reforming the existing public system is nothing new and is a hot topic.

Spain is very aware of the urgent issues bearing down on Europe’s pensions because these concerns are especially keenly felt here.

The country has one of the most rapidly ageing populations in Europe as well as one of the lowest birth rates.

Moreover, Spaniards tend to live longer than most of their European counterparts.

A sharp rise in the number of women and immigrants in the workforce over the last 10 years is helping to pay the pensions of people who are retiring now. But there are real concerns that the public system could run out of money during the next few decades, when the number of retirees is set to shoot upwards.

The current Socialist government is committed to consolidating, rather than radically changing, the current pension system to defend it from future threats.

The publicly funded pension system based on employee and employer contributions is held dear by many Spaniards and the thought of privatisation or forcing the retirement age up to keep the coffers full is very unpopular.

Companies and employees can and do have separate private pension funds, but the government insists that these will continue to be complementary rather than an alternative to the public system.

As part of a current round of reforms, the government wants to create a large reserve fund to back up any future shortfalls in money.

Incentives – rather than rules – to encourage people to work beyond the current retirement age of 65 are also on the agenda.

There are doubts, but Spaniards will be hoping that reforms like this might be enough to safeguard their future pensions.


In Denmark, there is broad political consensus that the retirement age must be raised. An ageing Danish population and the rise in life expectancy means there will be more elderly who need care and fewer hands to give it.

Meanwhile, the strict Danish immigration laws currently limit the number of foreign workers who come to Denmark and join the labour market.

In 2006, the so-called Welfare Agreement Act was passed in the Danish Parliament, Folketinget. The agreement means the retirement age will increase from 65 to 67.

In order not to create financial insecurity for those affected, this will happen gradually, with an increase by half a year in 2024, 2025, 2026 and 2027.

But it is in principle open-ended. Thus, if life expectancy continues to rise, politicians have agreed to let the retirement age follow suit – again with a time buffer so those affected have time to prepare themselves financially.

Even the Social Democrats – who have taken a leading role in building one of the world’s most generous welfare states – now agree that Danes must spend more of their lives working. While labour unions agree to these changes, the extreme left parties have opposed them.

The Danish pension system is based on three pillars. They are: the state pension, which serves as basic security for all citizens against poverty in old age; the employment-based schemes which ensure a reasonable relationship between income while employed and in old age; and private pension savings, which act as a supplement to the other two schemes. –BBC News

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