EUROPEAN PAPERS ON THE NEW WELFARE

Sustainability and Adequacy of Pensions in EU countries: Synthesis from a Cross-national Perspective

1. Introduction

The challenges to financial sustainability that EU countries face are well documented, and the focus is justifiably on policy reforms that are addressing them. But, the impact of reforms now on the design of pension systems and incomes of future retirees is less clearly delineated, and this paper addresses this issue. Likewise, the need for sustained policy remedies to the current economic and fiscal crises is widely recognised. At the same time, the effects of actions taken now on the nature of future fiscal and social challenges arising are masked. The analyses presented in this paper emphasize for policy-makers the need to be aware of the impacts of decisions on sustainability issues and fiscal consolidation upon pension systems’ structures and pension income adequacy for future pensioners. The paper is based upon the author’s presentation to the Belgian EU Presidency conference, “Assuring Adequate Pensions and Social Benefits for All European Citizens”, held at Liège, 6-8 September 2010.
The rest of this paper is laid out in five sections. Section 2 sets the context by highlighting sustainability challenges arising from population ageing, the financial and economic crisis and fiscal crisis. Section 3 summarises the patterns of pension reforms enacted in EU countries, and analyses its aggregate fiscal impact. The indicator of interest here is the benefit ratio (as calculated by the Working Group on Ageing of the EU’s Economic Policy Committee). Section 4 analyses how pension reforms have reshaped the structure of pension systems in selected EU countries. These impact-of-pension-reforms results are derived from the simulations of pension income entitlements for future retirees, undertaken by OECD in 2009. The next section (Section 5) presents micro results on changes in the entitlement of public pension income during the period 2006-2046. The indicator in use is the net replacement rate, as provided by the Indicators Sub-Group of the Social Protection Committee of the European Commission. As for OECD calculations, it is calculated for stylised workers, and approximating impact of pension reforms on the income entitlement of future retirees. Section 6 concludes by providing a brief discussion on policy challenges that EU countries face as they go forward. The focus will be on the pension policy as well as on fiscal and labour market policy.
This paper follows on from an earlier paper (Zaidi 2010), which stratified EU countries according to the poverty risks of its older populations (aged 65 or more) in 2008. The highest poverty risk rates were observed in Latvia (51%), Cyprus (49%), Estonia (39%) and Bulgaria (34%), and the lowest in Hungary (4%), Luxembourg (5%) and the Czech Republic (7%). These results report on the current adequacy of retirement incomes, and the outcomes reflect both the influence of past pension policies and also the labour market and demographic experiences in working life of the specific cohort of current retirees. A question of parallel interest is how current generations of workers will fare in their incomes and poverty risks as and when they retire. The major part of this paper focuses on this question, using the best knowledge currently available, in the form of projections and simulations on income entitlements of future retirees in EU countries. An essential context for these analyses of expected future pension incomes is the awareness of the public finance challenges that EU countries are facing, both now and in the future. And it is to this that we first turn.

Asghar Zaidi: Director Research, European Centre for Social Welfare Policy and Research, Vienna – www.euro.centre.org/zaidi .
The author is grateful to the Belgian Federal Public Service Social Security, particularly Koen Vleminckx, for the support in carrying out this work. Many thanks to Katrin Gasior, who prepared the graphs included in the paper, and to Sean Terry for providing invaluable support and advice in editing the paper. Views expressed here are the author’s own and not necessarily shared by the Belgian Government, or by the European Commission.


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