NCPA - National Center for Policy Analysis

European Union Urges Public Pension Reform

January 7, 2003

Although national governments have sole responsibility for pensions, or social security, a European Union (E.U.) report urges them to raise the retirement age, increase employment and keep public finances in order. The report also recommends E.U .governments speed up radical economic reforms to defuse a "pension time bomb" in the next few decades.

Over the next decade, the "baby-boom generation" of the 1950s and early 1960s will reach retirement age, increasing the pressure on the public finances of the 15 countries in the E.U.

  • In most European countries, pension expenditures are expected to rise significantly from about 2015 onward, giving rise to concern about the capacity of future pensions to ensure decent living standards for the retired.
  • Due to longer life expectancy and low birth rates, in 2050 there will be only two people in work for each person over 65 -- half the current ratio.
  • As a result, E.U. governments' expenditures on pensions are set to rise by about a third to more than 13 percent of gross domestic product within the next four decades.

The problem is likely to be more acute in countries such as France, where most pensions are funded by the state. "The financing of the [French] pension system for the decades ahead is currently not secured and further significant reforms are needed," the report said.

Other countries, including Germany, Spain and Italy will also have to speed up reforms to prevent a collapse of their pension systems.

By contrast, in the U.K., where nearly half of pension incomes come from private providers, the funding of pensions is not a concern.

Source: Francesco Guerrera, "E.U. Governments Warned on Pensions," Financial Times, December 18, 2002.

 

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