Why we must work until we drop – from cradle to grave

By Stewart Fleming

Date: 17/03/05

Demographic ageing was once seen primarily as a threat facing industrial countries like France, Germany and Italy with over-generous pensions systems, the looming "pensions timebomb".

Today, ageing is recognised as an epochal force which is shaping not only the economic performance of countries - China's dash for growth is partly designed to cope with a looming ageing crisis - but also what sort of societies they will become.

"The social policy debate about ageing is now much more complex than it was a decade ago," says Monika Queisser, a senior official in the social policy division of the Organisation for Economic Co-operation and Development (OECD) in Paris. "The primary focus used to be on who is going to pay the pensions of the old. Now it is much more about how to get marginalised groups into the work force."

Should EU governments turn to increased immigration to help expand their work forces as the European Commission says they must and, if they do, what will be the political fallout, in particular the impact on race relations? Can policymakers help women reconcile the conflict between work and family life, perhaps by the provision of more, costly, child-care systems? To what extent should disabled people be pressured to work and how do we help the disabled, who are desperate to work to get jobs from employers who are reluctant to hire them? Are governments justified in raising the retirement age to try and improve not only their economic growth prospects but also the affordability of the overly generous pension promises they made in the 1970s? If so, how should they set about it?

Such questions demonstrate how a policy challenge which was once cast in terms of the affordability of state pensions has been transformed into a discussion about the nature of the societies in which we live.

"Demographic change will have an impact on the economy, healthcare, the sociology and the psychology of society," the Commission says in its Green Paper on demographic change, released today (17 March).

This shift in focus reflects in part the realisation that much of Europe's poor growth performance relative to the US can be explained by demographics.

The OECD points out in its recent report, Going for Growth, that Europeans generally work fewer hours than Americans. In general, European countries have been far less successful than the US at integrating immigrants into society and into their work forces. In addition, the "baby bust" which followed Europe's "baby boom" of the 1960s, when coupled with declining fertility rates in many large EU countries, is beginning to show up in shrinking labour forces.

"Old models of social protection based around redistribution within and across generations are a dead end for policymakers," it says. Without fundamental policy changes, "we can either maintain the living standards of the elderly by taking ever more resources from the working age population or we let the living standards of those outside the labour force fall".

EU governments began more than a decade ago to tackle the demographic threat to the financial sustainability of state pay-as-you-go pension schemes, those financed by taxes not by invested savings. They began cutting benefits in ways which voters barely noticed at first.

The basic state pension in the UK is worth only 16% of average earnings. Over a fifth of pensioners, two million people, are living below the official poverty line.

Since the 1990s, other EU countries have been following the UK's lead. "Across Europe, there has been a general scaling down of benefits in state schemes," says the OECD's Queisser.

The big difference, however, is that state pension schemes in countries like France, Germany and Italy pay pensions worth not 16%, but 70-95% of the average earnings of employed persons. The pension problem for these countries is not millions of poverty-struck pensioners begging on street corners.

Given the demographic outlook, governments with high levels of pension protection could not meet their pension promises without raising contribution rates and hence labour costs. The benefit cuts have been designed to make the finances of generous state pension schemes sustainable.

Such is the diversity of different pensions systems in the Union and the uncertainty about the long-term outlook, whether state pension schemes are now financially sustainable across the 'old' EU15 (conditions in the new member states are very different) is still unclear, says Queisser.

Uncertainties about future population trends, the pace of growth and levels of unemployment are factors which make it difficult to forecast whether a state pension scheme is in trouble.

The results of a Commission survey, expected later this year, which is asking EU countries to report on their pension reforms, may shed more light on the financial sustainability question.

One fundamental change has already taken place which symbolises the changed thinking on pension reform. Twenty years ago EU governments were trying to tackle Europe's unemployment problem by encouraging older workers to take early retirement. Today, across the EU, workers who quit early are being penalised, not encouraged. Boosting the size and quality of the EU's labour force and therefore its potential growth rate, has been the new priority under the Lisbon Agenda, and getting the new generation of healthier pensioners to stay at work longer has been one of the agenda's targets.

"Given Europe's demographics, Lisbon's social pillar must be seen a part and parcel of its economic reform and growth agenda, not a second order priority," says a top EU official.

• Stewart Fleming is a freelance journalist based in Brussels.

Analysis feature on the social component of the Lisbon Agenda and the debate on whether to tackle demographic change with increased immigration.