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Rescuing pensions

Regina Mennig / nmApril 10, 2014

An ever-shrinking pool of young people will have to foot the bill for Europe's aging population. A new study suggests there's a lot Europe can do to strengthen its social system, but implementing reforms may not be easy.

Old people sitting on a bench
Image: picture-alliance/dpa

Researchers have put more than two dozen European countries under the microscope, as part of a study into social spending and aging populations. And, as is so often the case, Sweden has come out on top. It appears the Scandinavian country has done a good job in catering for its older citizens.

"This is due to a very good labor market policy and low unemployment, but it also comes down to the treatment of older people," says researcher Michael Bräuninger from the Hamburg Institute of International Economics, which published the study on Wednesday (09.04.2014). "In Sweden, older people are very well integrated into the labor market. This is certainly one of the bigger challenges for other European countries."

Germany and Italy, says Bräuninger, are among those "other European countries." They're currently approaching a threshold - the "baby boomers" from the 1950s and 60s are getting ready to retire, and a shrinking pool of younger people will have to finance their pensions.

Urgent reforms needed

In recent years, both Germany and Italy have tackled some important reforms to make the pension system more sustainable, says Bräuninger. He's referring to moves to raise the retirement age and incentivize citizens to take out private pensions. In Germany, this is done through the so-called Riester pension scheme, named after the minister of labor who introduced it. Those who take out private pension insurance get a subsidy from the government.

An advertisement on a building for the pension scheme
The German government praises its plans to allow some workers to retire at 63Image: picture-alliance/dpa

Bräuninger says Eastern European countries, in particular, will struggle with the burden of an aging workforce. "They only have a short period of time until an aging population becomes a massive problem. They also need to stop the exodus of young and especially productive workers."

The higher the proportion of employed people paying contributions to the pension scheme, the better a country can sustain its social system - this is one of the arguments in the HWWI study.

That means there's still a need for reform in Germany, says Christian Bäumler, Chairman of the Christian Democratic Workers' Association of Germany (CDA). "In particular, the participation of women needs to be boosted. Now more than ever, Germany is going to have to improve the compatibility of work and family life," he said.

In Sweden, almost 80 percent of women between the ages of 15 and 64 are gainfully employed. German women have caught up in recent years - just over 70 percent of them are working.

Live longer, retire later

The HWWI research also said European countries need to take another look at the retirement age if their social systems are to be strengthened in the long term. It refers to a European Commission proposal of 2012, which suggested linking the retirement age to rising life expectancy.

Production inside a Mercedes factory
Many car manufacture workers are ready to retire in their late 50sImage: picture-alliance/dpa

In most European countries the legal retirement age is 65. In Germany, the previous government decided to increase the retirement age to 67, but the current coalition is planning to allow employees to retire at 63, as long as they can show they paid pension contributions for more than 45 years.

This is a "fatal sign," according to the authors of the HWWI report. "In Germany, the various early retirement options and generous pension schemes of the 70s and 80s have created a society that, at the age of 50, is already mentally prepared to receive a pension."

Attitude problem

CDA Chairman Christian Bäumler argues the change in attitude needs to come from employers. "My observation has been that employers often aren't willing to take on workers over 60, even in large companies," he said. "Most employees, for example those in major automobile companies, working on assembly lines assembling cars, take early retirement in their late 50s."

He argues there is more Germany could be doing to avoid problems down the track. Opening the labor market to more immigrants, he says, would be one way to gain more workers, and thus more contributors to the public pension system.