Europe's demographic time bomb has been ticking for decades, with European Union societies ageing and people living longer. Currently, more than a fifth of the European Union's population is over 65 years old; this figure is expected to reach a third by 2050. The World Health Organization warned last year that in 2024, for the first time, the number of people over 65 will outnumber those under 15 in Europe.
Despite a large increase in immigration over the past two decades, the continent still needs to attract enough workers to cover rising public pension costs: economists predict that by 2050, the ratio of workers to every retiree in Europe will fall from three today to fewer than two.
Meanwhile, in 17 of the 27 EU member states (all but one are in Western Europe), annual public pension spending exceeds 10% of gross domestic product (GDP). In Italy and Greece, pensions account for more than 16% of public finances in GDP.
Raising the retirement age frustrates workers
To combat exorbitant and rising costs, several EU countries have been overhauling their public pension systems, including raising the retirement age. France, for example, faced months of protests last year over plans to raise the retirement age for older workers to 64 from the current 62.
Other European countries have gone further, with the UK planning to work until age 68 from the mid-2040s onwards. Women in the UK previously retired five to seven years earlier than men, but moves to equalise the pension age have sparked demands for compensation for affected women.
“The Netherlands recently reformed its pension system, but the goals that were set have not been met,” Hans van Meerten, professor of European pension law at Utrecht University, told DW. “And it seems to me that Germany, Belgium and many other European countries have not implemented the reforms they need. They are shooting themselves in the foot.”
Retirement ages are rising in some EU countries, meaning workers have to wait longer to get their pension. Image: Andrey Popov/Depositphotos/IMAGO
Adding to the strain on European public finances, millions of people do not have enough saved in private or occupational pensions to supplement their public pensions: Eurobarometer data from last year showed that only 23% of EU residents have an occupational pension scheme and just 19% have a private pension product. These figures vary widely between EU member states.
Another survey, conducted by insurance industry group Europe, found that 39% of respondents had no savings for retirement, with figures even higher among women and workers over 50. Many who have saved are unhappy with the results of their investments.
Low yields and inflation hurt savers
“Over the past decade, Europe's pension crisis was significantly exacerbated by a period of low real yields that were insufficient to outpace inflation,” Arnaud Houdemont, communications director at Brussels-based investor group Better Finance, told DW. “The result was a significant decline in savers' purchasing power.”
Rich Country, Poor Pensioners: Old Age Poverty in Germany
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According to an analysis by the Finnish Pensions Centre, the average nominal pension yield globally was 8% last year. But when the highest inflation in decades that followed the COVID-19 pandemic was taken into account, the yield was just 2%. Inflation in the euro area peaked at 10.6% year-on-year in October 2022.
Haudemont said high fees, poor asset allocation and a lack of transparency in pension products were also contributing to the decline in returns.
EU portable pension schemes are slow to adopt
To address the savings gap, the EU introduced the Pan-European Personal Pension Product (PEPP) in March 2022. The scheme allows workers to save up additional pension funds that are fully portable when they move to another EU country. However, only one country, Slovakia, has introduced the scheme.
“PEPP has been in place for two and a half years,” van Meerten said, “but large investment funds have said they don't have the expertise to deploy the PEPP product on their own and are looking for other partners.”
Some pension experts say PEPP is also problematic because it is complex and restrictive. It is also seen as an unwanted competitor to investment funds such as BlackRock Inc. and Fidelity Inc., whose biggest clients are the big pension funds in the Netherlands, Norway and Germany, representing tens of millions of European savers.
The arrival of new brokers like Trade Republic is making it easier for more Europeans to save. Image: Michael Billmeyer/Chromo Orange/Picture Alliance
Van Meerten advocates simplifying the PEPP and making it more flexible, as some EU countries do not give the new pension scheme the same tax benefits as other retirement savings products.
Many EU industries, from Germany's chemical and metals sector to France's national rail company, have their own occupational pension plans that cover about 60% of German workers who pay social security contributions. These plans often offer perks to savers, especially those in physically demanding jobs, including early retirement options.
Workers demand more pension flexibility
Consumers are demanding more flexibility over their investments and retirement ages, and the rise of new brokers that offer smartphone apps to manage investments, such as Robinhood, eToro and Germany's Trade Republic, has to some extent taken over cumbersome and overcomplicated pension systems in many parts of Europe.
Traditional lenders argue that mobile investing apps force users to take uninformed and unnecessary risks that could erode long-term returns, while supporters say they make investing simple, cheap and transparent.
In future, more EU governments may allow workers to invest some of their public pension savings directly in the stock market, as Sweden has done, where private pension funds have jointly negotiated lower fees, helping to boost retirement benefits.
Van Meerten believes workers would be more motivated to save if they were given more say in how their investments are managed and when they retire.
“Do you want your savings to be green? Do you want to invest in Israel? Let the individuals decide. Why should the social partners or trade unions decide for you?” he asked, referring to union-run pension schemes.
Better Finance's Houdmont warned that a “shift of burden” from state to private pension savings would bring a day of reckoning in the mid-term, and said savers were not prepared for it.
“Europe's next generation is likely to be significantly poorer and retire later than previous generations,” he said.
Editor: Ashutosh Pandey
