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Pensions in Europe
by Joanna Griffin

LONDON, October 6, Graphic News: As political leaders across Europe scramble to defuse the timebomb that is the pensions crisis, it hardly matters now that the clock has been ticking for several decades. The question is how quickly they can act to avert a major disaster without igniting a political or social fuse.

Last week Prime Minister Silvio Berlusconi appealed to the Italian electorate to back his efforts to reform the countryÕs costly and overburdened welfare system, including pensions. A divided coalition approved the reforms set out in the 2004 Budget, but the three main unions are threatening unrest. Their response to Berlusconi: Ò(Pensions) crisis, what crisis?Ó

With one of the lowest birthrates in the world and one of the most expensive welfare systems, Italy does indeed face a pensions crisis: the system currently eats up a whopping 15% of GDP.  The government wants to make it harder for Italians to qualify for the generous state provisions and to raise the mandatory retirement age in 2008 from 60 to 65. It also wants to scrap the ÒseniorityÓ pension allowing Italians to retire at 57 after 35 years of work.

But Berlusconi is merely grappling with problems all too common in Europe, where declining fertility rates and ageing populations threaten to reduce the ratio of workers to pensioners to two to one by 2040. Such demographic changes have simply made unsustainable the pay-as-you-go system in which todayÕs workers pay for yesterdayÕs men and women.

Given the unpopularity of raising contributions in high-tax societies and of reducing pension payments, raising the retirement age seems the only way to go. On June 3rd France came to a standstill when thousands protested against moves to make workers pay five more yearsÕ contributions before qualifying for the state pension. This time Prime Minister Jean-Pierre Raffarin avoided the fate of Alain Juppe in 1994 and pushed through the unpopular moves.

Similarly, in Austria, where ÒpamperedÓ workers routinely look forward to downing tools at 57 or 58, Chancellor Wolfgang SchŸssel overcame fierce union opposition to his proposals to withhold pensions until 65 this summer. More controversial proposals to cut pensions are still in discussion.

Germany is the cradle of EuropeÕs pay-as-you-go pension system, which was established by Bismarck more than 130 years ago. Chancellor Gerhard Schršder tinkered with the countryÕs pension provisions in 2001, but now he faces opposition from his fellow Social Democrats to plans to gradually increase the retirement age from 65 to 67 between 2011 and 2035.

The situation is less dire in countries such as Britain, the Netherlands and Switzerland, where welfarism has been less cherished as the soft cushion of old age. In Britain, where the pension system accounts for around 5% of GDP, the government has managed to shift some of the  burden of pensions in the direction of the employer and the worker himself.

What else could be done? Britain's shadow Work and Pensions Secretary David Willetts argued recently that the pensions problem is more about low birthrates than ageing populations and proposed changes to current tax and employment law to encourage women to have more babies. Such moves are likely to be more palatable than, say, proposals for increased immigration, which come with big political warnings attached.
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