Demographic, economic and societal changes over the next 50 years will affect pension systems in many different ways.
Developing countries are expected to face rapid population growth.
Developed countries on the contrary will face a population ageing marked by a massive increase of the population aged 65 and older. That means that the old age dependency ratio1 will increase. However, the age structure does not tell the whole story: much will also depend upon the employment rate in the different countries and in particular upon the employment rate of older workers. Higher employment rates will have a positive effect on the economic dependency ratio2 of the pensioners.
The employment rate plays a major role in coping with the financial consequences of our ageing societies in relation to pensions. But its increase will not solve all the problems which emerge due to the phenomenon of ageing; moreover, it can offer only a temporary respite. The formation of the pension systems too will have to contribute in order to deal with the consequences of the ageing phenomenon, as well as with other aspects of social change.
Pension reform policies put into place differ from country to country: they are determined by how the systems are constructed, by the policy conceptions of governments and social partners and by the economic and fiscal resources available.
In this article we wish to present the major pension reform trends that can be observed in Western Europe and to highlight the European trade union position in relation to pensions.
1. Europe Is Ageing and the European Workforce Is Ageing Too
Between 1950 and 2000, the percentage of people over 65 years of age in EU25 increased from 9.1% to 15.7%. By 2025 this group will represent 22.7% of the entire population.
Between 2010 and 2030 the EC expects an increase in EU25 in the number of
1. Older workers (55-64 y) by 15.5%,
2. Elderly people (65-79 y) by 37.4%.
These demographic shifts are due to:
1. Continuing low birth rates,
2. Continuing increase in longevity.
The result of these demographic trends will be that we will have more pensioners in the future and pensioners who live longer.
2. Average Exit Age from the Labour Force and Economic Dependency Ratios of Pensioners
While the European population has grown older, the average effective exit age from the labour market has fallen dramatically during recent decades, mainly due to the development of pre- and early retirement systems created in an effort to combat youth unemployment. In this way, the number of contribution years has decreased while the number of years spent in receipt of pensions has been growing. This has created tremendous pressure on pension systems and made reforms of the employment and pension policies unavoidable.
Table 1: Average exit age from the labour force (2006)
* EU25 – Source: Eurostat (2007), Structural Indicatory; OECD
Table 2: Support ratio: number of contributors relative to the number of pensioners in public pension schemes (number of contributors/100 pensioners)
Source: EC, European Economy, Special Report n° 1/2006, The impact of ageing on public expenditure. Projections for EU25 Member States on pensions and health care.
3. A Two-track Approach
The challenges resulting from these demographic changes could cause a dramatic fall in annual economic growth rates in Europe. This reduction in economic growth could affect the sustainability of our social systems in general and of the pension and health systems in particular. Since the 1990s EU governments have followed a two-track approach: reform of the pension systems has gone hand-in-hand with policies intended to push up the total employment rates and those of older workers (55-64 years) in particular. These reforms have resulted, since the beginning of the 21st century, in a reversal of the trends in exit age and employment rates.
4. The European Employment Strategy
The Lisbon European Council of 2000 adopted an ambitious plan for the future of Europe: the overall aim of employment and economic policies should be to raise the employment rate as close as possible to 70% by 2010 and to increase the employment rate for women to more than 60% by the same year.
In addition to the 2010 Lisbon targets, the Stockholm European Council of 2001 set a new target of raising the average EU employment rate for older men and women (aged 55 to 64) to 50% by 2010.
Another target relating to older workers was set by the Barcelona European Council in 2002. It focuses on the average labour market withdrawal age which is meant to rise by 5 years by 2010.
As can be seen from the European Commission’s employment report 2007 and from the most recent Eurostat-figures, the EU is still far short of the original objectives set in Lisbon, Stockholm and Barcelona. In 2007 the overall employment rate in EU15 was 66.9%, the female employment rate was 57.1% (figure for 2006), while the employment rate among older workers was 46.6% (figure for 2007). The average exit age from the labour force rose to 61.2 years in 2006, less than one year higher than in 2002! It is important to observe the huge differences in exit age between countries: e.g. between France (58.9 years) and Sweden (63.9 years) there was a difference of 5 years in 2006.
All these figures prove that progress towards the quantitative objectives of the European Employment Strategy is a slow process.
5. Pension System Reforms3
In 1999 the European Commission presented its Communication on a Concerted Strategy for Modernising Social Protection. This communication was the start of a long-term Europe-wide reform process in the pensions area.
The Laeken European Council of December 2001 decided that Member States should cooperate on the question of reform of pension systems by seeking to achieve common objectives, namely: the adequacy of pensions, the financial sustainability of pension systems and the adaptability of pension systems (modernisation). The method to be used was the open method of coordination (OMC).
Since the 1990s substantial pension reforms have taken place.
A first important reform concerns the increase in the statutory pension age. Most EU15 countries have now a standard retirement age of 65 years for men. France is a notable exception with a pension age of 60. Efforts are being made to raise this age. Denmark, Germany and the UK are in the process of increasing the retirement age to 67 years. In most countries the retirement age for women is the same as for men: 65 years. Some countries, such as Belgium and the UK, are gradually equalising the retirement ages for women with those of men.
Governments are also tryng to discourage early retirement and to encourage people to work longer, at least until the statutory retirement age. This is done either by raising the age at which early retirement may be taken or by applying actuarial reductions for early retirement and by offering bonuses or higher accrual rates to workers who continue to work after a certain age (e.g. in Belgium after 62) or after having reached the statutory retirement age (e.g. in the UK).
Recent reforms have also strengthened the benefit/contribution link of pension systems. This has mainly occurred through the introduction of longer contribution periods for entitlement to a full pension and by calculating full pensions on the basis of lifetime earnings instead of final salary. Finland, Portugal and Sweden are all moving to a lifetime average earnings measure. France is moving from the best 10 years to the best 25 years in the public scheme, while Austria is extending the averaging period from the best 15 to the best 40 years.
Taking more care of non-standard careers is a further measure. Public pension schemes, unlike private schemes, often allow people to acquire pension credits for periods of short-term contracts, part-time and voluntary work as well as for some types of break in the working career such as child and old-age care, education and unemployment. Only some countries (e.g. Sweden, Austria, Denmark) provide State- or employer-financed contributions into second-pillar schemes for periods of maternity or parental leave. Some other countries plan the introduction of such allowances or have developed measures with a similar effect (UK, Ireland, Germany, Luxemburg).
Workers who change employer frequently are better served by statutory schemes, and many statutory schemes have moved towards accommodating short-term and part-time contracts, while supplementary pension schemes often work to the detriment of mobile workers.
Given the rising importance of workers’ mobility, some Member States (Belgium, Germany, Denmark, the Netherlands and the UK) have improved the portability of supplementary pension rights. The EU has not yet managed to devise a global solution to this problem.
The introduction of unisex-tariffs in second-pillar provisions or in the mandatory funded part of the first-pillar provisions is an important measure in addressing the gender imbalances in relation to pensions. Such a measure has been introduced in several Member States: in the Netherlands, Denmark, Ireland, Sweden, Greece, Luxemburg and Germany (for the ‘Riester’ voluntary savings).
More and more countries have switched to price- or close-to-price indexation of benefits, both for earnings-related schemes and for minimum pension schemes. Some countries, such as, Finland, for example, use a mixed index composed of wage growth and price developments. Other countries, Italy for example, increase high pensions at a lower rate than medium-level and small pensions, with only the two latter categories receiving full price compensation. The same applies to Austria.
However, in order to better protect non-standard workers, some countries have increased the levels of the guaranteed minimum pensions beyond the statutory index adjustments (e.g. in Belgium, Spain, Portugal and Ireland). This measure is also intended to combat poverty in old age.
Some systems have introduced a life-cycle approach. As a response to future increases in life expectancy, a number of countries have undertaken reforms which are designed to stabilise pension systems and to safeguard financial sustainability. This is done by the introduction of automatic adjustment mechanisms (e.g. a ‘life-time coefficient’ which adjusts future pensions automatically to increases in life expectancy) or of periodically required reviews and adjustments: in Spain, for example, Parliament reviews reform measures every five years. In Sweden national account schemes have been introduced. Germany will adjust benefits in the points system. Denmark has introduced a direct link between increasing life expectancy and the pension eligibility age. In 2003 France linked the number of contribution years required for entitlement to a full pension with life expectancy.
A large number of countries have also created public pension reserve funds in order to guarantee the future solvability of their public pay-as-you-go systems. every year countries like the Netherlands, Belgium, Spain and Portugal set aside part of their budget in order to be able to meet future pension liabilities.
Several countries see a role for funded private pension provision as part of the total pension provision. This has traditionally been the case in the UK, the Netherlands and Denmark. Moreover, the importance of private pension provision has essentially been increased by the introduction of a funded tier in the statutory schemes in a number of Member States including Sweden. Furthermore, numerous countries have increased provisions for occupational or private schemes that complement public pensions (Germany, Austria, Belgium, Italy). The reason for this increased interest in funded (second- and third-pillar) pensions is the decrease in replacement rates expected to occur in most Member States. However, in all but a few Member States public pay-as-you-go pension schemes are expected to remain the principal source of income for pensioners. This will allow Member States to maintain a degree of redistribution and solidarity that is necessary to provide fair incomes for all older people.
Martin Hutsebaut: Secretary to the Directors’ Committee, European Trade Union Institute, Brussels.
1 Number of people aged 65 and over as a percentage of people aged 15-64.
2 Number of pensioners as a percentage of contributors.
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Tags: EU pension reforms, Trade Union policies