NCPA - National Center for Policy Analysis

Europe Struggles With Pension Reform

October 30, 2000

Attempts to deal with the long-term financial insolvency of public pension systems -- Social Security in the U.S. -- is occasioning political battles in some European countries.

Without tax increases, European governments cannot afford to pay future retirees the benefits they are paying today's retirees.

  • For instance, Germany's 19.3 percent tax on wages pays only three-quarters of the annual pension bill; the rest comes from general revenues.
  • In Japan and Italy, every retiree is supported by four taxpaying workers today; by 2030, there will be only two workers per retiree.
  • In Canada, the United Kingdom and Sweden, however, observers say major reforms have largely licked the problem.

European countries are moving toward systems in which workers will rely more on private, invested funds for their retirement income, rather than generous state pensions. This means a combination of encouraging corporate sponsored pensions, tax breaks for voluntary individual savings, and diversion of some payroll taxes to private funds.

  • The German government, for instance, proposes tax breaks for voluntary private retirement savings from workers, beginning with 0.5 percent of wages and climbing gradually to 4 percent by 2008.
  • The French government wants to allow workers to set aside as much as a quarter of pay; employers would be able to make matching contributions of up to about 4,500 euros ($3,783) a year.
  • And the draft European Union law proposes standard regulations for company pension funds, allowing companies to run one pan-EU fund instead of 15 and giving workers inter-country portability for their pension funds.

Despite the opposition of unions, particularly in Germany and France, an IFOP-Merrill Lynch survey last November found that 78 percent of the French favor private retirement funds.

Source: Geoff Winestock, "Pension Reform Becomes a Focus Not Just in U.S., but Everywhere," Wall Street Journal, October 30, 2000.


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