An ageing population presents a major challenge to pension systems in all Member States. Unless women and men, as they live longer, also stay longer in employment and save more for their retirement, the adequacy of pensions cannot be guaranteed as the required increase in expenditure would be unsustainable. By 2060, the life expectancy at birth for males is projected to increase by 7.9 years and by 6.5 years for females, when compared to 2010. And the problem is not far-off – it is upon us now as the baby-boomers retire and the working age population of Europe begins to shrink. This is reflected in an annual increase of around two million people aged 60+, almost twice as high as in the late 1990s and early 2000s. By contrast, the number of people of prime working age (20-59) will fall every year over the coming decades.
Population change over the previous year, EU-27, 1996-2061
Together, longevity growth and the transition into retirement of the baby-boomers will have far-reaching economic and budgetary consequences in the EU, reducing the economic growth potential and exercising pressure on public finances.
These prospects are further aggravated by the current financial and economic crisis. Sluggish economic growth, budget deficits and debt burdens, financial instability and low employment have made it harder for all pension systems to deliver on pension promises. Pay-as-you-go pension schemes are affected by falling employment, and hence lower pension contributions.
Funded schemes are affected by falling asset values and reduced returns. It has thus become more urgent than ever to develop and put in place comprehensive strategies to adapt pension systems to changing economic and demographic circumstances.
The challenges are massive, but surmountable, provided the right policies are put in place. Reforms of pension systems and retirement practices are essential for improving Europe’s growth prospects, and they are urgently required in some countries as part of current actions to restore confidence in government finances.
As the economies and societies of the Member States are becoming more and more integrated, the success or failure of national pension policies and reforms has ever stronger repercussions beyond national borders, particularly in the Economic and Monetary Union. The central importance of pensions for Europe’s social and economic success and the increased risk of cross-border spill-overs from national pension policies mean that pensions are increasingly becoming a matter of common concern in the EU. Indeed, the success of retirement reforms in the Member States is a major determining factor for the smooth functioning of the Economic and Monetary Union, and will affect the EU’s ability to achieve two of the five targets of the Europe 2020 Strategy – raising the employment rate to 75% and reducing the number of people at risk of poverty by at least 20 million.