Work longer, have more babies

Date: 27/09/03

Europe's pensions crisis won't go away. Governments need to do more, and voters need to accept changes

EUROPE is currently witnessing the slow-motion explosion of the most predictable economic and social time-bomb in its history. As life expectancy began to increase quickly in the second half of the 20th century and fertility began to decline in the 1970s, the foundations of Europe's generous state-pension systems began slowly to crumble. These are pay-as-you-go schemes that force today's workers to finance yesterday's workers' pensions, based on the assumption that workers hugely outnumber retirees. But this has not been true for at least two decades. The current worker-pensioner ratio in Europe has fallen to about three workers for each pensioner, and it looks set to fall to a mere three workers for every two pensioners within 30 years. Most European governments have responded to this looming crisis only with the kind of timid tinkering that does little more than shift the problem to their successors.

This is precisely what the Italian government is about to do. Silvio Berlusconi's pension reform, unveiled this week, will come into effect only in 2008 when the current prime minister is unlikely still to be occupying the Palazzo Chigi in Rome. Instead of speeding up an earlier reform, Mr Berlusconi is merely fiddling with so-called “seniority” pensions that allow workers to retire at 57 if they have been in work for 35 years. Rather than abolishing these next year, as expected, he will continue them until 2008, and offer workers a fat bonus if they carry on working despite being eligible for what is now widely viewed as an over-generous perk.

Mr Berlusconi's loss of courage is typical of similar half-hearted efforts elsewhere. Germany is currently discussing an increase by monthly increments of the retirement age from 65 to 67 between 2011 and 2035, but even this minimal change is proving too much for the left wing of the ruling Social Democratic Party. France passed a law this year that will oblige its public-sector employees to work as long as those employed in the private sector in order to qualify for a full state pension, a welcome reform that should nevertheless have happened years ago. Austria's government dared to push through a rather more ambitious reform this year, but tiny Austria's spending on pensions is also of Italian proportions.

There is little mystery about why governments have been so pusillanimous. Changes to public pension schemes are extremely unpopular with workers and voters. In France and Italy, trade unions have often brought their countries to a standstill at the slightest hint of any change to pensions. Mr Berlusconi's attempts at pension reform played a big part in the downfall of his previous government in 1994.

And yet sooner rather than later, European governments, as well as the voters whom they are supposed to serve, will have to face the unpalatable truth that their current public pension schemes are not sustainable. Addressing that crisis will be painful for everyone, and no single remedy will be enough, but there are measures which both voters and governments should pursue - with some urgency.

First, governments will have to act much more boldly to reduce the scope of the core pay-as-you-go public pension system. Second, employees, public or private, should be encouraged instead to channel their savings into private retirement accounts, either administered by employers or (even better) run directly by fund-management firms, thus taking responsibility for their own retirements. If encouragement does not work, such private savings may have to be made compulsory. Third, the state retirement age should be scrapped, because a fixed pension age makes little sense either for privately-funded pension schemes, which should be encouraged, or for public schemes. Alternatively, or as well, many European countries will have to do something to address the effects of their declining birth rates in order to redress the imbalance between workers and pensioners.

Ten more years?

Revising current public-pension promises is tough. But the most immediately effective policy would be to raise the retirement ages in public schemes. Over the past few decades retirement ages in Europe have actually declined, even as life expectancy has soared. It is open to question whether workers with retirement now in their sights were really promised 30 years of leisure when they began their working life. If Europeans want to retain their public schemes - and most seem to want this - then it seems inevitable that they will have to work longer, probably at least five years, possibly as much as ten years longer. Employers, as well as workers, will have to adjust to this, but there are few good reasons why more healthy people in their 60s should not be holding down jobs, rather than sitting idle at younger taxpayers' expense.

Addressing the other half of the problem, the burden on younger workers in Europe, is just as necessary in the longer term, but an even more delicate task. Increasing immigration would be hugely controversial, but it makes good economic and social sense, and not only from the point of view of pensions, as this newspaper has often argued.

Even with more immigration, increasing the domestic supply of younger workers - ie, having more babies - could also be desirable and, if current trends continue, probably necessary. This sounds like the most pleasant of all remedies. But governments will have to tread warily here. Whether or not to have children is one of the most private of all decisions, and coercive social-engineering schemes should be repugnant to any liberal democracy. Nevertheless, the reason for plummeting birth rates in Europe may have something to do with the choice already forced on too many young women: start a career and put off childbearing until much later in life (which leads some to forgo it all together) or have children but miss out on the chance to compete in the workplace. Removing obstacles to women having children and pursuing a career simultaneously, through changes to the tax system and employment law, would not only help the next generation of young women and their children, but eventually their parents and grandparents as well.

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