Financing decent pensions: a challenge for European states

Financing decent pensions: a challenge for European states

Women demonstrators in Paris during a demonstration against a new pension tax imposed by Emmanuel Macron’s government on 15 March 2018. A woman holds a placard that reads “Hands Off My Pension”.

(AP/Christophe Ena)

Some 70,000 people took to the streets of Brussels on 28 May 2018. And tens of thousands demonstrated once again in several Belgian cities on 2 October. The trade union mobilisation against the reform of the pension system in Belgium attracted nationwide attention. But this protest movement did not emerge from nowhere. It is, rather, the culmination of many years of discontent.

The federal government undertook to reform the entire pension system, to cope with Belgium’s ever-ageing population, from the moment it came to office in 2014. Ageing has a cost. In 2016, public pension spending in Belgium amounted to 12.1 per cent of its GDP, and looks set to rise in the decades to come. According to the 2018 Ageing Report, published by the European Commission, the figure is expected to reach 14.5 per cent in 2040.

The measures devised by Pensions Minister Daniel Bacquelaine to tackle the situation – raising the legal retirement age to 67 years (compared with 65 years at present for men and women) and tightening the conditions for early retirement – were quick to trigger a public outcry.

Limited solutions

The Belgian example mirrors the situation throughout the European Union. According to the estimates of the Commission’s Ageing Report, 65.3 per cent of the total population in the EU27 (Britain is no longer included due to Brexit) is currently of working age (15 to 64) and 19.5 per cent is aged 65 and above.

In 2070, the ratio is expected to be very different: the 15 to 64 age group is projected to make up 55.9 per cent and the 65s and above, 29.2 per cent. The trend is clear: there will be fewer people of working age and more pensions to pay, a scenario that has pushed member states to seek solutions designed to ensure the sustainability of the system.

Overall, their response has been the same as Belgium’s. With the exception of Poland, most countries have raised the legal retirement age, which some plan to link to increases in life expectancy. In its 2008 Pension Adequacy Report, the European Commission notes that Finland has decided to gradually raise the statutory retirement age from 63 to 65 by 2027. Then, “As of 2030, the pensionable age will be directly linked to life expectancy, growing by 1-2 months per cohort, in line with the longevity gains,” the report continues.

Most of the EU27 have also decided to limit access to early retirement, using levers such as increasing the minimum number of contributory years required to qualify for a full pension and introducing penalties to discourage early retirement.

At the same time, since 2015, some member states have introduced more socially beneficial measures to combat high levels of precariousness, such as the increases in basic pensions seen in Austria, Ireland, Romania, Slovakia and Slovenia, or the new pension indexation mechanisms in Bulgaria and Cyprus.

These measures do not, however, hide the cruel reality that the trend is towards lower pensions. According to OECD figures, in many countries, the gross pension “replacement rate” – the percentage of a person’s former income received after retirement – is often low. In 2016, while it was 77 per cent in Luxembourg, it was only 38 per cent in Germany or 61 per cent in France and 58 per cent for the EU28 as a whole.

Not just a matter of budgeting, but also wellbeing

Are these the right solutions to ensure the sustainability of pensions? The trade unions think not. Equal Times was able to ascertain this during an event held at the Austrian Permanent Representation to the EU (Austria currently holds the rotating presidency of the Council of the EU), in Brussels, on 9 October.

The event was organised by the Austrian trade union federation Österreichische Gewerkschaftsbund (OGB) and the German union confederation Deutscher Gewerkschaftsbund (DGB), and provided an opportunity to take a critical look at the reforms introduced in many EU countries.

“At the moment, everything that is being implemented in terms of reforms is about what is financially viable and not about what is humanly possible. Who can imagine a childminder having to work until the age of 70?” said Bernard Achitz, general secretary of the OGB. Ingo Schäfer, head of the DGB’s pensions department, expressed the same view.

“The debate should not be purely mathematical. We also have to consider the issue of wellbeing. Pensions are an insurance policy. We also need to talk about what constitutes a decent income,” he said, referring to the very low replacement rates.

More broadly, the unions also raised doubts about the effectiveness of the measures taken. “It isn’t so much a question of raising the retirement age or reducing the scope for early retirement but of looking into whether states have a labour market that allows workers to stay in it for a long time and under good conditions. If this is not the case, you cannot implement this type of reform,” explains Evelyn Astor, economic and social policy officer at the International Trade Union Confederation (ITUC).

It is a fact: in many countries, the actual retirement age is very different from the official one. Workers over 50 often struggle to stay employed. So, asking them to prepare to work for longer is somewhat ironic, even in the context of ever-increasing life expectancy.

By 2060, it is projected to increase from 78.1 years to 84.8 years for men and from 83.7 years to 89.3 years for women in the EU27. “But life expectancy is an average,” argues Marina Monaco, advisor at the European Trade Union Confederation (ETUC).

“People living in poverty have a lower life expectancy than those with a high standard of living.” Applying a retirement age increase in a ‘linear’ way is therefore unfair.

Despite these criticisms, the unions are also exploring potential financing options. And for them, the message is clear: pensions can be funded without, for example, raising the retirement age. One of the options put forward is to increase the rate of employment, which is otherwise expected to remain relatively ‘flat’ in the future, going from 70.1 to 75 per cent between 2016 and 2070, according to the 2018 Ageing Report published by the European Commission.

One solution would be to facilitate access to employment for currently vulnerable groups such as young people or migrants. Another avenue trade unions are exploring is women’s employment, which is often fragmented or part time, due to maternity and child raising. The idea is to use all the levers available to enable the people concerned not only to build up a decent retirement pension for themselves but also to become contributors to the system and to ensure its sustainability.

“If mechanisms are not introduced to improve women’s participation in the labour market, we will always have problems,” underlines Astor. On a broader note, Monaco points out that, “the quality of the jobs on offer also needs to be improved. Precarious or poorly paid work does not help people to contribute to the pension system.”

“Parametric reforms”

But, once again, would that be enough? Pierre Devolder is a professor at the Catholic University of Louvain-la-Neuve (UCL), Belgium, a specialist in theories on the calculation of insurance and financial rates and a member of the Chaire Pensions (Chair on Pensions). In his view, the measures taken by the member states in recent years are merely “parametric reforms”, like stopgap repairs.

“A few parameters have been adjusted rather than restructuring the whole system, which is what is actually needed to adapt it to current demographics,” he explains. For him, the solutions aimed at increasing the employment rate or certain groups’ labour market participation are interesting, but not sufficient. “These are still adjustments to a system that needs to be completely revisited. These new participants in the labour market will of course contribute to the pension system, but they will also open up new rights. That’s good, but it will also have a cost for the system,” he says.

For Devolder, the current problem is that “the system in place in many European countries has been the same since the trente glorieuses (the “glorious thirty” post-war years). In terms of service, we are told in advance what we will benefit from. And in terms of financing, we are using the “pay as you go” model, which means that today’s working people are financing today’s pensions. In the long run, with future demographic changes, this is going to be hard to sustain, so much so, in my view, that it is going to undermine the system.”

Devolder points to the idea of turning to capital gains taxes as one potential solution. “Income from capital is increasing,” he says. “But social security is financed by salaries. Taxing capital could therefore offer a solution that would also meet the challenge of the future: the robotisation of work. This evolution poses its own challenges, as companies working with robots do not, of course, pay salaries.”

Another, more structural solution advanced by the professor is the point-based pension system, such as that already in place in Germany, for example. The idea is simple: workers accumulate rights in the form of points throughout their working lives, which are converted into a pension at the end of their career. This system has the advantage, argues Devolder, of taking into account the new realities of the labour market, characterised by mixed employment. “Different types of points can be implemented that could be combined,” he explains.

In Belgium, the government was contemplating introducing such a system but finally decided against it. The value of the points would have followed the growth in average incomes. But there is one snag, which the unions pointed out: when configured in this way, the points-based pension makes it impossible to predict what you will receive at the end of your working life. If the economic climate is bad, the government can decide to temporarily freeze the value of the points, turning the system into a lottery, which would no doubt increase pensioners’ vulnerability.

Another sticking point for trade unions is the need to take into account the diversity of career paths. “It is fine to say that everyone has the right to social protection, even those with mixed or fragmented careers,” says Monaco of the ETUC. “But the emphasis should be placed, rather, on the need to create the conditions to provide workers with stable and well-paid jobs [Editor’s note: fixed-term, full-time contracts]. This would also give them access to better quality social protection.”

The trade unions are, of course, wary about condoning mixed employment, which is seen as precarious. The best solution would be to provide workers with the stable employment conditions that would enable them to build up decent social rights.

Whilst opinions sometimes differ on the solutions to be adopted, everyone agrees on one thing: the coming years are crucial. In light of this, trade unions are emphasising the need to discuss the future of pension systems in the European Union within the framework of the European Semester, aimed at coordinating the EU member states’ national policies on budgets, growth and employment. This would also provide an opportunity to discuss other issues such as the place given – or not – to private pensions or the influence of the Stability and Growth Pact on member states’ capacities to invest in their pension systems. “It is essential that the issue of pensions, and social issues in general, be linked to the economic considerations of the European Semester,” concludes Monaco.

This story has been translated from French.