Hand-wringing over who will support
future pensioners as the dependency ratio increases is hardly new,
writes Jeremy Woolfe. But
the new picture as painted for the European Parliament, as part of
a far-reaching report looking into the issue by a prominent
academic, is even more depressing than most.
Go deeper with GlobalData
The financial crisis is at the forefront of
international attention, but there is a issue Europe faces with the
potential to make the current economic woes pale into
insignificance: its ageing population.
According to a briefing paper for the European
Parliament, the economic crisis, while “significant”, is a mere
short-term shock, the likes of which has been seen many times
before.
This “shock” is also costing the European
Union (EU) 6 percent of GDP and has increased unemployment by 10
million. Furthermore, it is causing European governments to
contribute 12 percent of GDP to propping up the banking sector.
However grave, this still pales in magnitude
to the effect of ageing on pensions systems. Specifically, says the
paper, the damage caused by population ageing in the EU is about
ten-fold more substantial.
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By GlobalDataThe report was commissioned by the Parliament
to its external expert, Professor Axel Böersch-Supan from Mannheim
University, for a meeting of its Special Committee on the
Financial, Economic and Social Crisis. Social Impact of the
Crisis – Demographic Challenges and the Pension System looks
into challenges faced by the diverse EU pensions systems.
Biggest financial challenge
ever
In terms of shear destructive power, the
report states that the “impact of the [2008-2009 economic] crisis
on pensions is in the order of 5 percent to 15 percent, while the
impact of aging is doubling the burden on the younger generation,
an increase in the order of more than 100 percent in many member
states… While financial markets were the main culprit of the
current crisis, they remain nolens volens [whether one
likes it or not] part of the solution in tackling the challenges of
demographic change”.
The report finds that while the effect of the
financial crisis may be felt “for a decade or more”, population
ageing will “not go away… It is a century event”.
It continues that: “The demographic challenge,
however, is unique, meaning a danger of far worse than any periodic
collapse of trading bubbles.”
Using wording that is strikingly barbed by any
standard, especially for use by officialdom, the paper goes on to
refer to “ignorance, denial and political opportunism [that] have
in many member states undermined a consistent [effort to defuse]
the demographic time bomb”.
Among analysis of technical issues expanded on
in the briefing, is the comment that the impact of the crisis on
pension funds is very different across countries.
It records Organisation for Economic
Co-operation and Development (OECD) estimates of a loss of 7.2
percent in the Czech Republic to more than a third in Ireland. It
finds that the crisis is estimated to have reduced the wealth
accumulated in pension funds overall by 15.8 percent.
The increase in old-age dependency ratio, that
is, the number of beneficiaries from old-age pensions divided by
the number of individuals who contribute to the pay-as-you-go
system in Europe, has increased from 51 percent in Sweden, to about
200 percent in Poland and the Slovak Republic.
Public pension systems
unsustainable
The paper comments that no current system can
survive a doubling of the cost-to-payer ratio. Pressures will make
public pension systems unsustainable all over the EU in a very
foreseeable future if no appropriate policy actions are taken in
time.
In its conclusion, it warns that “turning the
clock backwards on reform”, as has been done in some EU member
states in response to the economic crisis, will “badly backfire”.
Later reforms will be politically even more difficult than they
already are.
Looking at the obvious remedy to coping with
ageing and pensions of increasing retirement age, the briefing
report cites a “natural” compromise between a fixed retirement age,
which adds all gain in longevity to the retirement period, and
shifting the retirement age by the entire period resulting from a
longer life.
A compromise proposed in the report is to keep
constant the proportion between life spent in retirement and life
spent working. The author clearly favours some kind of
proportionality rule, rather than the conventional proposals to
increase retirement age by two years, that change to take place
over the next 20 years.
Use of a proportionality system has helped to
“sell” a reform in Sweden, in contrast to one in Denmark which
tried to change retirement age by a fixed number of years and
failed. According to the expert, “a similar fate has undermined the
German predefined schedule of retirement age increases, and
encountered fierce opposition in France, Greece, and
elsewhere”.
Blame for reluctance to reform in the light of
clear factual evidence was placed on short-termism in the political
systems. A meeting on pension problems held by the European
Parliament’s Crisis Committee heard French MEP Pervenche Berès say
that democratic governments face a hurdle because they “only have
to think about the next election”.
At the same meeting, Edward Whitehouse, head
of pension policy analysis at the OECD, asked whether harm has been
done by the handing of the management of pension funds on
“speculative basis”.
The European Parliament’s 10-page briefing
note follows a 175-page report from the Commission in October that
delves into country-by-country analyses.
This in turn follows communication from the
European Commission Dealing with the Impact of an Ageing
Population in the EU, published last summer. That Commission
paper portrays a future that is far less stark than that from the
Parliament.
