by Steve Coulter on 18th June 2019
Greater dependency ratios may imply pensions reform—but not that it be unfair.
Europe is turning grey. By 2060 over a quarter of the EU’s population will be over 65. Ageing is accelerating as the baby-boom generation retires and average life-spans continue to increase.
But while most of us are celebrating the fact that people are living longer, healthier lives, demographers and officials in finance ministries fret that, on current trends, more of us could be eking out our longer retirements in poverty. The problem is that we are not saving enough. Aviva, an insurance company, estimates that Europeans needs to save an extra €2 trillion each year to close the ‘pensions gap’—the difference between what people need to save to ensure an adequate retirement and what they are actually saving.
With most people still reliant on state pensions to make ends meet in later life, ageing populations will have profound consequences for the fiscal positions of member states, as working taxpayers shift into retirement and begin claiming old-age pensions in increasing numbers. Action is therefore needed to ensure that a decent retirement is affordable and available to all.
But there is a right way and a wrong way to go about it. Currently, a favoured policy lever for reducing the dependency ratio—the number of retirees as a proportion of the number still in work—is to make people work for longer and/or reduce the generosity of state pensions.
This is meeting resistance. In Croatia, for example, the trade unions have successfully mobilised public support to demand a referendum on government plans to push back the retirement age from 65 to 67 and cut the amount retirees receive. The final number of signatories to their petition is expected to top 700,000, getting on for 20 per cent of the population—was above the 373,000 threshold required to trigger the ballot. Slovak trade unions, also through a collection of signatures, have convinced their parliament to fix the retirement age at 64.
Why are some governments pushing so hard to increase retirement ages? And why are they being thwarted?
Politically active
A few people enjoy their jobs so much they never want to quit. But most look forward to the day when they can put up their feet and resent having this date pushed back by governments. This presents a problem for reformers. Numerous studies show that older people are politically active and vote in greater numbers than youngsters. Moves to make people work for longer have fuelled resentment, anger and sometimes violence—from Greece in the austerity years after the financial crisis to the gilets Jaunes disturbances in France. It’s, therefore, no surprise that politicians approach the issue of later retirement ages with trepidation.
The economic interests of taxpayers and older workers are not all that is at stake here. There are also moral and equity considerations. First, workers approaching retirement may have made financial and personal plans based on an anticipated retirement date. Shifting this date around can play havoc with these plans for people who may have only a limited time remaining in the workforce to make adjustments. Widespread age discrimination in the labour market may also make it unrealistic for people to remain in work for longer. Until this is tackled, a longer working life may simply mean more time spent in poverty, as unemployment benefit is typically less generous than the state pension.
Secondly, those lower down the social hierarchy have lower life expectancies and can, therefore, expect shorter retirements. They are also less likely to have private pension savings to cushion the blow of exiting employment. Making them wait longer to draw a state pension is therefore unfair as they may have fewer years to enjoy it.
Reformers have therefore tended to approach the issue of pension reform by doing it in the most boring and glacial way possible. They stagger changes to things like retirement ages, so they take place sufficiently far into the future that most people feel unaffected directly, or that it’s too far off for them to care.
Most of the EU-15 countries have general retirement ages of 65. Denmark, France, Germany and Spain are shifting from 65 to 67 years, while the goal is 68 in the UK and Ireland. Most of these changes are slated to take effect in the 2020s. In newer member states retirement ages are generally lower, but most expect to raise them to the same level over the coming decade. Several countries also have early-retirement schemes allowing for an exit from the labour force before reaching retirement age—in some cases with no deductions to the pension if the insurance period is long enough.
Life expectancy
In Croatia, the unions based their campaign opposing later retirement around objections that their government was trying to impose retirement ages typical of western Europe on workers with a lower life expectancy than the EU average. Citizens there are sicker, working conditions harder and technology is at a lower level. When push came to shove, Croats chose to push back against a reform they obviously felt went too far, too quickly.
A lesson, then, for reformers. Citizens expect their nation’s public finances to be managed prudently. But they should not ignore equity issues to do with differing income levels and life expectancies of the segments of their populations that are affected. Less haste, more fairness should be the guiding principle.
(Steve Coulter is head of communications at the European Trade Union Institute and a visiting fellow in the European Institute of the London School of Economics and Political Science.)
