Report warns of looming pensions debt crisis

Date: 02/11/00

By Peter Chapman

EU FINANCE ministers will be given a stark warning about the pensions time-bomb ticking inside EU governments' coffers next week.

They will be told that they must raise retirement ages and get more women into the workforce to reduce the strain on the public purse, or face the consequences.

A doom-laden report to be discussed by ministers next Tuesday (7 November) will underline the severe impact which falling population levels and growing numbers of 'baby-boomers' reaching retirement age between now and 2050 will have on member states' budgets.

The paper drawn up by the Economic Policy Committee (EPC), which provides expert analysis for ministers on key issues, warns that the ratio of pensioners to the working-age population which must support them will double over the next 50 years. It says most countries are heading for a debt crisis if pension policies are not changed to tackle the problem head on.

Without swift action, says the EPC, the ageing of the population will force most member states to spend 3-5% more of their gross domestic product on pensions. For some countries, the outlook is much worse: Spain would face an increase of 8.3%, while the Netherlands and Portugal would see a 6.2% rise.

The paper warns that even if the EU achieves the goals agreed at the March Lisbon summit - economic growth of around 3% over the next decade and a 10% increase in the employment rate - many member states could still face a financial crisis because of the growing burden on their pension systems.

If the Lisbon reforms are implemented, typical increases in pension spending between now and 'peak years' over the next 50 years would still be 4.1% for Portugal, 6% for the Netherlands and 3.7% for Ireland. "An increase in public expenditures on pensions of some 4 to 5 percentage points of GDP, even spread out over several decades, poses a considerable challenge for the sustainability of public finances and the public debt burden," adds the report.

Some countries are, however, expected to escape relatively lightly. These include the UK, which has a relatively meagre public provision and a large private pension sector; and Denmark, Finland and Sweden, which operate 'funded pensions'. Under these schemes, workers' own contributions form a large part of their pension provision.

The report concludes that the only sure cure for the looming debt crisis is a prescription of economic medicine far more potent than that envisaged in Lisbon. It says priority should be given to increasing the retirement age and clamping down on early retirement schemes which are a particular drain on national budgets. Efforts to increase the number of women and older people in the labour market are also seen as crucial to reduce the budget burden.

Diplomats say the report will form the basis for a high-profile declaration by EU leaders at next month's Nice summit stressing that the problem is of concern to the whole Union and highlighting the need for concerted action to tackle it. "If you can present it as a Europe-wide problem it takes the sting out of any painful medicine," said one source.

EU Finance Ministers are to be given a stark warning about the pensions time-bomb ticking inbside EU governments' coffers. A doom-laden report to be discussed by ministers on 7.11.00 will underline the severe impact which falling population levels and growing numbers of 'baby-boomers' reaching retirement age between now and 2050 will have on Member States' budgets.