Pension systems are increasingly a hot topic for debate in European countries in the aftermath of COVID-19, especially given the systemic trends- most notably population ageing- and their impact on pension systems. The challenge remains, how will pension systems provide financially and socially sustainable pensions in the future? Without significant reforms, pension systems- and pensioners with them- are heading towards a cloud of chaos and uncertainty. Let’s explore pension system dynamics, with a special focus on Europe and the OECD (Organization for Economic Co-operation and Development).
Post-Covid Dynamics for Current Pensioners
In the aftermath of Covid-19, we’ve seen governments of high-income countries rush to the rescue of their respective pension systems. Pensions simply couldn’t fulfill their obligations to society’s retirees. The retirees are dependent on their pensions to live out the remainder of their lives after decades of service- and thus this is a huge social issue. COVID had reduced pension inflows and thus put pressure on the system with less contributions coming in from companies and organizations- which in turn had their own difficulties making it through the labyrinth of shutdowns and a ravaging pandemic. Nonetheless, governments bailed out the pension systems, and thus the current crop of retirees have so far gotten their pension benefits promise fulfilled.
A Totally Different Story for Millennials and Younger Generations
For millennials and younger generations, the story is really one of tragedy and misfortune. Since 2008- but even more post-COVID – young people have had a much harder time entering the labor force. This entails all sorts of repercussions spanning from less years of work by retirement age, less income and savings, and importantly less expected pension benefits post-retirement.
The Real Cause of Pension System Malfunction- Population Ageing
At the heart of the problem is a demographic ticking time-bomb. OECD countries are experiencing rapid ageing. According to the OECD’s “Pensions at a Glance 2021” report, “Over the last 30 years, the number of people older than 65 years per 100 people of working age (20 to 64 years) increased from 21 in 1990 to 31 in 2020 in the OECD on average. Over the next 30 years, it is expected to reach 53”. In addition, the number of pensioners has increased less than the number of old people. The study states that “Between 2008 and 2018, the number of pensioners increased by 20% – whether or not disability pensioners are accounted for -, much less than the 27% increase in the number of people aged 65 or more on average in the OECD”.
Think of a pension system as a bank. To fulfill obligations towards a pensioner post-retirement, it relies on new entrants into the labor force who would enroll in the pension system and contribute a percentage of their income each month so as to save for their own retirement some 4 decades later. Of course, it is much more complicated than that, but it’s really not that complex. Therefore, with increasing old-age-to-working-age ratios across the OECD countries, there simply is a fundamental mismatch. Business as usual is not a way forward.
Painful Policy Decisions Are Inevitable
It’s already beginning. While politicians would hate to be remembered as those who took away benefits from their respective political constituents, kicking the can down the road has ceased to be a viable policy action. There’s no avoiding one of three policy reforms- or a mix of all: increasing required pension contributions, increasing the retirement age, and reducing pension benefits. No wonders this is a perilous political terrain for any politician.
The OECD’s “Pensions at a Glance 2021” report projects that “the normal retirement age will increase by about two years in the OECD on average by the mid‑2060s”. It also states that “according to European Commission projections, the average ratio of benefits to wages will decline by one‑quarter by 2070, which would stabilize pension spending as a share of GDP in many countries despite ageing”. However, it questions whether politicians will actually enact the reforms needed to save the pension systems without watering them down to make them palatable to their constituents politically- thus defeating the purpose of the reforms.
Moreover, about two thirds of OECD countries have introduced automatic adjustment mechanisms in their pension systems. According to the 2021 report, such mechanisms “are a set of rules that automatically change pension system parameters, such as pension ages, benefits or contribution rates, when demographic, economic or financial indicators change”. As such, politicians avoid announcing painful changes every couple of years to respond to new imbalances in the system. Your benefits fall on their own, hurrah!
The Political Storms Are Underway- From France to Czech Republic and Beyond..
The pension protests are here to stay. And how not, when people are increasingly unready to retire. Less income, less savings, less pension benefits, higher life expectancy.. All of this means more uncertainty and a harder time making a stable, peaceful life come old age. It’s just unfair, but millennials have not had it easy- have they?
In France, a significant portion of society cannot accept President Macron’s raising of the retirement age from 62 to 64. For them, it is an existential issue. For them, the President is touching on a lifeline issue here, and they’d much prefer him to get the money from elsewhere to plug the holes in the system. Indeed, France is in a dire situation. We’re talking about the French worker who does a physically intense job here. It’s taxing- with a huge wear-and-tear toll on the body.
Retirement is not just a way of life for French people. It’s also a form of social protection for those who have done their fair share yet received minimal gains. Yes, minimal gains relative to the one-percent that has absorbed the most out of decades of globalization and capital accumulation. Alienating these people will only bring forth the very populism that has plagued politics and policy in Europe.
Whatever way one looks at it, it’s a rotten deal. The pension system, absent serious reforms, is bound to collapse. Kicking the can is no longer a policy option. The haircut is a done deal, yet how will the burden of losses be distributed, and will it be equitable? Europe needs a real plan to save the pension system and provide sustainable futures for its labor force- with huge implications for society, the economy and political systems. For now, future generations are looking at lower benefit ratios (benefits as a percent of pre-retirement income), lower indexation levels (indexing for inflation..), higher required pension contributions, higher retirement age, and lower pension benefits. The question that remains, “how will future generations save for retirement?”
Btw check out ort article about grandma’s remedies here.