Financial sustainability of social protection systems (with particular reference to retirement pensions)

On the other hand, the Council of Europe in Göteborg expressed its concern for safeguarding an adequate standard of living for the elderly. In fact, with a distribution system there is intergenerational solidarity, given that offspring can satisfy the rights of their parents. Nonetheless, in the past, Governments have made use of this system for redistributing income and at the same time have included the minimum pensions of persons who have made small contributions to the system. By doing so, the true spirit of a system of distribution is overlooked, given that this system should redistribute the income of a person over his or her working lives, rather than a distribution between social classes or generations. The latter type of distribution should always be financed by public budget and not by way of social contributions; when the onus is put on social contributions, an element of indebtedness is introduced in the system. This approach might have been able to hide its troublesome effects whilst there were cohorts of contributors; however, it has become an additional burden on the system when the demographic trend has been reversed.
The OECD Secretariat5 has drawn up a model that helps to estimate the changes in a ‘standard’6 country regarding the number of pension beneficiaries and the total of benefits between 2005 and 2025, in order to maintain the threshold of public debt as a percentage of GDP at the level of around 55% in 2050.

Table 1

Although the data represent only a rough estimate, we can foresee that the longer it takes for countries to embrace old age pension measures, the greater the chance is of this adjustment being both critical and dramatic. Experience shows that, when reforms are made to retirement regimes, normally a long transitory period is needed for the population to come to terms with it and to modify their options concerning their savings. Since the nineties, the majority of EU Member States are trying to carry out reforms of their pension systems in order to make them fairer, more suitable and sustainable, financially speaking. The Commission and the Council of the EU support and strongly back this process7.

5 Cf. Dang, T.T. et al. (2001): “The fiscal implications of ageing: projections of age-related spending”, OECD Economics Department Working Papers, No. 305, Paris.
6 Within the model, country estimates are the U.S.A, Japan, and members of the OECD, whose public expenditure on old age pensions is lower than that of European countries. This means that the European average model would be higher than the data from the OECD. Moreover, the average does not provide indications as to difference between European countries themselves.
7 Cf. Council of the European Union (2003).

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