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Pension is not a luxury, Europe protests prove it

Jon Van Housen & Mariella Radaelli (Euroscope)
Filed on January 18, 2020 | Last updated on January 18, 2020 at 10.29 pm

Estimates say the UK now has a $4-trillion retirement savings shortfall that is projected to rise by four per cent a year when the total GDP of the country is $3 trillion - so the future shortfall is already bigger than the entire economy.

It's a record for even strike-prone France. For 35 days, nationwide, workers went out on strike, the longest-ever that affected transport services, to protest against the changes proposed to the country's retirement and pension programmes.

It could just be a taste of things to come in Europe. Planners and leaders looking at the pension numbers know something has to change. Those with the entitlements might agree - if it is someone else's retirement plan, not their own. For each worker and household, the current plan is sacrosanct - the only change expected is to increase benefits, not reduce them.

Such is human nature, but when the demands of we the people crash against the immutable forces of physics or mathematics, we know what prevails. Despite protests, it is the man who will have to acquiesce.

The numbers tell the story in Europe. Generous payouts, low birthrates, and an aging population mean that state pension plans are sure to run out of money. The only question is how soon.

In France, President Emmanuel Macron tried to force the nation to face up to this growing reality. France currently has 42 separate retirement schemes, which is a headache to administer and is also not entirely fair.

Workers can, in theory, retire at 62 in France but previous reforms have increased the number of quarters required for a full pension, so most people work beyond that age.

But if they work for the government itself or in public services they can get a much better deal. Police officers, military personnel, energy sector workers and others benefit from 'special regimes' that allow full and early retirement. Train conductors, for instance, can stop working at 52.

Pharmacists, lawyers, physiotherapists, dock workers, and even opera house employees have separate systems offering specific benefits, resulting in a bewildering range of retirement regimes.

France is in the spotlight due to attempts at reform and subsequent unrest, but it is far from alone.

Estimates say the UK now has a $4-trillion retirement savings shortfall that is projected to rise by four per cent a year when the total GDP of the country is $3 trillion - so the future shortfall is already bigger than the entire economy.

Even the prudent Swiss are less rational when confronting the issue. Voters recently rejected a modest pension reform plan that would have raised the retirement age for women from 64 to 65 and increased the level of required worker contributions. Swiss actuaries are now likely scratching their heads and wondering where all the pension funding will come from in the future.

But at least the UK and Switzerland have pension funds that can pay current pensions. Few other European countries do not. They would need money from each year's general budgets to pay the benefits. Italy, France, Belgium, Germany, Austria, and Spain have what is as known pay-as-you-go pension plans.

Overall, public pension plans in European pay-as-you-go countries can now meet about 60 per cent of retiree pensions, with the rest of the money coming from the general budget each year. The ratio of retained pension fund savings is certain to fall as the Baby Boomer population curve continues to hit and that generation continues to retire.

Europe's population of pensioners is already the largest in the world. There are 42 people (who are 65 or older) for every 100 in the working age group, a proportion that will rise to 65 per 100 by 2060. By comparison, the US currently has 24 non-working people (65 or over) per 100 workers.

Across Europe, the overall birthrate has fallen 40 per cent since the 1960s to around 1.5 children per woman, according to the United Nations, while at the same time life expectancies have risen from 69 to 80 years.

And unlike most European financial problems, how to care for an aging population isn't a north-south issue. Poland, Austria, and Slovenia face difficult demographic challenges as do Greece and Italy.

It's a problem that even disciplined, well-planned governments will have difficulty handling. Generations of workers have laboured and paid under the assumption that their pension and age of retirement are set. If they are told the current calculations won't work, the information will be met with denial and outrage.

It is the reaction Macron's government now faces. The government has proposed setting a 'pivot age' of 64 in France. It means anyone working until 64 would get a full pension, but an early retirement would attract a lower payout.

France's largest union, the CFDT, backs the outline plan, but the hardline CGT and Force Ouvriere unions say workers don't have a clear idea of how much they will get when they retire. All the unions warn the pivot age means millions of people will retire later.

Some might say it's a luxury problem: Europe has an advanced healthcare and good quality of life that people live long lives. Still the cost of bread rises. France knows that too well. Its history has shown that one ignores the working man at great risk. As recent events demonstrate, they are still prepared to take to the streets.

Jon Van Housen and Mariella Radaelli are editors at www.luminosityitalia.com



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