European pensions targeted

All throughout Europe, governments are scrambling to shrink their growing budget deficits. Generous public pension systems have become prime targets for trimming and cutting. A majority of these countries have ushered in some form of social security reform in the past five years, mostly by boosting retirement ages.

By Sumi Somaskanda
September 24, 2012
USA Today

BERLIN -- After working most of his life, Paco Gonzalez says, he had long imagined how he would spend his retirement.

"I wanted to live quietly, retire someplace by a beach and dedicate my last years to living peacefully, with my wife alongside me," said the 70-year-old retired bank cashier in Barcelona. "But that's all failed."

Instead, Gonzalez says his dreams have given way to fear and uncertainty about what will happen to his future -- and to the social security payments he worked for years to earn.

"I am still receiving my pension, but I don't know if it's going to be there tomorrow," he added. "This government doesn't respect the laws or anything."

In Madrid and across Europe, governments are scrambling to shrink yawning budget deficits as the euro crisis has pushed some, including Spain, to the brink of insolvency. Generous public pension systems have become prime targets for trimming and cutting.

A majority of countries in the Organisation for Economic Co-operation and Development (OECD) have ushered in some sort of social security reform in the past five years -- mostly by boosting retirement ages. Spain is one of 13 OECD countries that have increased or are increasing pensionable ages to 67.

By the year 2050, Italy will usher in a legal retirement age of 69 -- a drastic jump from 59 in 2010. Greece has raised its retirement age to 65, after decades of allowing many to retire in their 50s with full benefits.

"Certainly, if you have people retiring in their 50s -- and you're not looking like you're going to get the tax revenues you thought you would in the future -- then it is difficult to be able to fill in some of the gaps in your public pension systems," said John Springford, an economist and research fellow at the Centre for European Reform in London. "You do need to get public-sector workers to work longer."

Tax revenue shortfalls, sluggish economic growth and ballooning debt crises have forced several OECD countries to trim social security expenses in countries where pensions have long been cushier than in the United States.

The USA guarantees average workers around 39% of their wages in retirement; in Italy, that number had been nearly 65%, and in Greece, 95%. Those rates have recently been slashed to curtail deficit spending, in which Greece allots 12% of its GDP for pensions, and Italy, more than 14% -- the highest rate in the world according to OECD figures. By comparison, the USA spends 4.6% of its GDP on Social Security costs.

The European Commission sounded the alarm this year in a report that warned that one quarter of the EU's population depends on social security to survive.

"Pensions are very high on the agenda because for many years, it was too low," said Laszlo Andor, European commissioner for social affairs and employment. "Reforms could have been and should have been implemented earlier."

One major impediment to solving the problem is Europe's low birth rates. Rapidly aging populations and longer life expectancies have pushed pension budgets up, while fewer workers are being born to provide the tax revenues to pay for it all.

In 1960, life expectancy in OECD countries averaged 68 years. By 2007, that number reached 79. As a result, the expected number of years that men in OECD countries spend in retirement rose from an average of 13 in 1958 to 18 in 2010. It will rise to 20 by 2050, says the OECD, and the numbers for women are four years higher.

At the same time, fertility rates across the OECD were 1.69 children per woman from 2005 to 2010, well below population replacement levels, analysts say.

"If people are living longer, healthier lives, they need to work longer," said Nicholas Barr, a professor at the London School of Economics and expert on pensions. "Any proposal for reforming pensions that doesn't include longer working life is a waste of space."

Yet, for years, retirement laws in Europe have forced older workers out of jobs. Only Sweden and the United Kingdom have done away with mandatory retirement statutes. In France, workers can be legally booted out of the office at age 70.

Springford says older workers may not be able to continue in manual labor fields but can work in the service industry into their 70s and beyond.

"There are quite a lot of people who would like to work longer, particularly people who have struggled to save for a pension," said Springford.

But the real thing buckling the pension accounts is healthy workers who retire far too early, say experts.

"The problem in continental Europe is that people don't even work to their normal pension age, as it is," said Edward Whitehouse, the OECD's pensions expert.

"In France, Austria or in Belgium, for example, the average age that men stop working is 58, which is way below the normal pension age in all of those countries."

Soaring unemployment levels are also plaguing the pension systems of the debt-ridden eurozone, the 17 countries that use the euro as currency.

In Spain, the jobless rate is nearly 25%, the highest in the industrialized world, and nearly half of younger workers are unemployed.

"If the population is aging and there are low employment levels, and those who are employed only work few hours, then the system clearly is not sustainable," says Zsolt Darvas, a research fellow at Bruegel, a Brussels-based think tank.

That trend has pushed young Spaniards to leave the country in droves. Retiree Paco Gonzalez has no children and is happy about it, because Spain's younger people face a bleak future.

"They're not going to have pensions!" he said. "How can you give a pension to someone who doesn't work?"

Barr says once the painful downturn years are past, and ailing countries start to flourish again, their governments will be able to establish pay-as-you-go systems to fund pensions.

But Whitehouse warns that a more serious fate awaits Europe's elderly and the upcoming generation of retirees.

"A very great achievement of social policy since World War II has been that at the beginning of that period, if you were old, you were very likely to be poor," he said. "What we risk in the future is the resurgence of old-age poverty."

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