Why Europe can’t face its retirement black hole
The political impasse in France shows how governments in Europe, caught between the demands of an aging electorate and the need to keep spending under control, continue to struggle to repair pension-shaped holes in their budgets.
The right to a pension has been at the heart of Europe’s social contract for decades. But longer life spans and fewer births mean that most governments are unable to get people into full retirement in their early 60s, as was once commonplace.
However, selling this fact to voters and gaining support from parliament is extremely difficult, as numerous mass protests and coalition disputes over the years have shown.
France provided the latest and perhaps most extreme example this week, when the government was forced to postpone plans to raise one of the lowest retirement ages in the European Union, currently set at just 62.
But the list is long, with initiatives to raise the retirement age or limit benefits failing or even being canceled in neighboring countries such as Germany, Spain, Italy and other countries.
The reason is simple: With the average European voter now in their mid-40s, governments have a lot to lose if they favor the older generation over the younger – even if that means delaying the day of reckoning.
Javier Díaz-Giménez, an economics professor at IESE Business School who specializes in savings and pensions, described this as “demographic capture of democracies” in an interview.
“Older people will always… completely block any reform that does not guarantee that they will receive whatever pensions they were promised,” he said.
But it can be done, as the Netherlands has demonstrated through carefully drafted and hard-won legislation.
REFORMS ARE USUALLY ONLY CARRIED OUT UNDER PRESSURE
Countries that implemented pension reforms, such as Greece, Portugal, Italy and Spain in recent decades or Sweden in the 1990s, often experienced extreme pressure from financial markets or international lenders.
In an illustration of the emotional content behind the reforms, Italian Labor Minister Elsa Fornero was moved to tears in 2011 when she raised the minimum retirement age and eliminated annual inflation adjustments for many pension funds.
At the moment, Fornero says he has no choice given the increasing sell-off in Italian government bonds, which is part of a wider debt crisis that almost brought down the euro.
“It’s like asking firefighters if they regret destroying something with the water they used to put out the fire,” he told Reuters. “We are carrying out reforms not to punish anyone, but because the financial world on which Italy depends wants to see serious and immediate reforms.”
Indeed, an academic study of major pension reforms in the EU between 2006 and 2015 found that governments tended to overhaul their pension systems only when they were under market pressure.
This may be less so in France, where the government pays an 80 basis point premium over safe-haven Germany to borrow on the bond market. Italy paid around 500 basis points at the height of the euro crisis.
“If market pressures in France were small, we could expect less sharp reforms,” Mattia Guidi, a professor at the University of Siena who co-authored the study, said in an interview.
WATER – THE NEXT THREAT
Crisis-era pension reforms in Greece, Italy, Portugal and Spain have been seen as capable of putting their countries’ public finances on a more sustainable path.
However, this does not guarantee that the reforms will last, or at least not completely.
Italy and Spain have postponed or softened some of their respective reforms successively after the crisis was over.
Even Portugal and Greece, which in the past decade slashed pension rights in return for bailouts, have increased benefits and are considering further increases.
For Joao Silva, co-editor of a report on pensions for the non-profit organization European Youth Parliament, this was inevitable because the reforms were implemented despite opposition from voters, not with their support.
“If you can’t build a big consensus on the political and economic formula, then it won’t last long,” Silva said.
Reform momentum has also waned in Germany, Ireland and the UK, which have not yet dared to take advantage of the so-called triple lock mechanism for calculating pension increases.
Fornero, a former Italian minister, also stressed the need to build popular support, arguing that French President Emmanuel Macron should do a better job of convincing his own voters that change is needed.
“Macron has lost touch with his citizens,” he said. “An increase of just two years… would be acceptable if explained well. But the reform has become a scapegoat.”
However, some countries seem to have found a way out.
Reforms in the Netherlands to switch to a defined contribution scheme, which provides no guarantee of payment and relies solely on the amount of funds employees accumulate over their careers, was approved with widespread support after a decade of negotiations.
A major financial crisis prompted Sweden to undertake similar reforms in the 1990s. Although unpopular at the time, these changes are now re-viewed as important for the country’s economic well-being.
Source: Reuters
