NCPA - National Center for Policy Analysis


April 16, 2007

The urgent need for pension reform in Europe has steadily climbed up the political agenda.  But the initiatives taken so far, including moves to raise the retirement age, can only be considered a first step if they are to avoid a demographic disaster, says Hans Martens, chief executive of the European Policy Center.

The problem is due to a combination of fast-rising life expectancies and low birth rates:

  • European Commission forecasts suggest that average female life expectancy in the European Union (EU) will rise to over 85 by 2050 from around 80 today.
  • Men will still not live as long as women, but their life expectancy will increase at the same rate, to 80.5 from 73.7 today.
  • At the same time, the fertility rate, or the average number of children per woman, will remain unchanged at under two -- i.e., below the rate needed to replace the current population.
  • As a result, the European Commission suggests that the number of people aged 65 and older as a percentage of the working population (aged 15-64) will more than double between now and 2050 to 53 percent from 25 percent.

The recent initiative in Germany, for instance, to raise the pension age to 67 from 65 is useful, as are reform attempts in other European countries, such as indexing retirement age to the increase in life expectancy, says Martens.  But a greater mix of policies is required to more completely solve the problem, and these include increasing productivity to boost economic growth, managing immigration and integration better, and fundamentally reforming retirement schemes.

Unfortunately, the pension time bomb has so far been too politically sensitive for the most radical solutions to be moved from the world of academic papers and expert reports to that of political action, says Martens.  But to avoid disaster down the road, Europe needs strong political leadership now.

Source: Hans Martens, "The Real Threat to 'Social Europe,'" Wall Street Journal, April 16, 2007.

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