Accessibility links

Europe: Unpopular Pension Reforms Could Force Governments Into Early Retirement

  • Mark Baker

Nothing, it seems, is more unpopular than pension reform. Italian Prime Minister Silvio Berlusconi saw that 24 October, when hundreds of thousands of Italians walked off their jobs to protest a plan to raise the mandatory retirement age. Already this year, France and Austria have seen general strikes over pension reform, and German Chancellor Gerhard Schroeder could lose his job over the issue. Still, experts say it's a step European governments must take as birthrates fall, life spans rise, and budget deficits spiral out of control.

Prague, 27 October 2003 (RFE/RL) -- Pension reform in Europe is proving very disruptive.

Hundreds of thousands of Italians walked off the job on 24 October to protest a plan to raise the retirement age and make it harder to stop working in their 40s and 50s.

In Germany yesterday, Chancellor Gerhard Schroeder's Social Democratic Party suffered an embarrassing defeat in local elections in the eastern state of Brandenburg. Reports said voters were protesting the chancellor's recent package of economic reforms, including tightening Germany's relatively generous public pension plan.

The problems in Italy and Germany highlight a continent-wide dilemma of widening budget deficits, slowing economies, and unfavorable demographic trends. Falling birthrates throughout Europe mean fewer people are entering the workforce to support pensioners who are living longer.

Already this year, France and Austria have seen crippling general strikes over proposed pension reforms. Many governments are now simply avoiding the issue to preserve public harmony.

The situation is especially dire in Italy, which has one of the world's lowest birthrates and one of its most generous pension schemes. Workers can retire with full benefits before the age of 57, provided they have paid into the state pension plan for at least 37 years. Many choose to retire even earlier in exchange for partial benefits.

Berlusconi would like to clamp down on this by raising the participation period to 40 years for men under 65. He would also like to raise the mandatory retirement age from 60 to 65.

"We are striking in order to show the government that the majority of Italian workers are against the budget and the so-called pension reform," said Guglielmo Epifani, general-secretary of CGIL, Italy's largest trade-union confederation.

In Germany, reform efforts are being driven by a burgeoning budget deficit. Public pensions face a deficit of more than $10 billion this year. A weak economy has meant fewer workers are able to contribute to the system.

Schroeder's proposals -- announced last week as part of his Agenda 2010 program -- would see pension payouts fixed next year and would call on retired persons to pay all of their nursing home insurance, instead of the 50 percent they are required to pay now.

Schroeder dropped -- temporarily, at least -- plans to raise the mandatory retirement age to 67 years from 65. Nevertheless, newspapers and opposition politicians accuse him of overseeing the first cut in benefits since the end of World War II.

Most European countries still use what is called a "pay-as-you-go" pension system. This means current workers -- through taxes -- cover the costs of the pension plan. Shortfalls are covered by the state budget. There is no large central fund to cover future obligations.

These types of systems work well when birthrates are high and life expectancies low -- as they were in Europe 100 years ago when the schemes were first devised. But these days, pension payments are taking a rising share of state budgets -- as high as 15 percent and growing in many countries.

Eckart Tuchtfeld is a researcher with Commerzbank in Frankfurt and the co-author of a recent report on the prospects for German pension reform. He tells RFE/RL that, if Germany fails to reform its pension plan, it will become completely unworkable over the longer term.

"[If we do not reform,] there would have to be massive increases in taxes to cover the pension obligation. Or the [worker] contribution rates would have to be raised from 19.5 percent -- today's level -- to well around 27 or 28 percent or even 30 percent of gross income," Eckart said.

In recent years, some countries -- notably Britain and the Scandinavian countries -- have had some success in shifting the pension burden to employers and to individuals through privately funded pensions. Many see this as the only way that state-funded pension plans can stay solvent.

Tuchtfeld says that, so far in Germany at least, private schemes have not made many inroads. "We have not seen a surge in private provisions, but this has certainly to do with bureaucratic burdens in connection with this reform. Since the government is willing to reduce the bureaucratic hurdles, we are confident that private provisions will play more of a role in the future," he said.

Meanwhile, a coalition of disgruntled workers and senior citizens may put an end to all of this in the voting booth -- as many apparently tried to do at the weekend in Brandenburg.

Walter Hirrlinger, the chairman of Germany's Senior Citizens Association, was quoted by the "Financial Times Deutschland" last week as saying, "We have a number of elections over the next year. My guess is that some 20 million pensioners will be looking very carefully at their voting slips."