The demographic time bomb in Europe has been ticking for decades. The countries of the European Union are getting older, and people are living longer. More than a fifth of the population of the European Union is now aged 65 or over. That number is expected to grow to a third by 2050.

Last year, the World Health Organization warned that in 2024, the number of people over the age of 65 will exceed the number of people under the age of 15 in Europe for the first time. Despite the large increase in immigration over the past two decades, the continent still needs to attract enough workers whose taxes can cover the rising costs of public pensions.

Economists predict that by 2050 there will be fewer than two workers for every pensioner in Europe, compared to three now. Meanwhile, the annual cost of public pensions has reached more than 10 percent of gross domestic product (GDP) in 17 of the 27 EU member states. All 17 – except one – are located in Western Europe. In Italy and Greece, pensions cost public finances more than 16 percent of GDP.

Raising the age limit irritates older workers

To deal with the enormous rising costs, several EU countries have changed their public pension systems, including raising the retirement age. In France, for example, last year there were months of demonstrations over plans to make workers retire at 64 instead of 62.

Other European countries have gone even further. Great Britain, for example, plans to extend working life to 2024 from the mid-68s. In addition, women in Britain used to retire five to seven years earlier than men, but the retirement age is equalised.

“The Dutch have recently reformed their pension system, but it is not achieving its goals,” Hans van Merten, professor of European pension law at Utrecht University, told DW. “Also in Germany, Belgium and many other European countries, I don’t see the necessary reforms. They are digging their own graves”.

Millions of people still do not have a private self-contributory pension plan to supplement their state pension. This puts an additional burden on public finances. Data from “Eurobarometer” from last year showed that only 23 percent of EU residents have a professional pension plan, while only 19 percent supplemented their state pension with a private one. The figures vary considerably between EU countries.

A separate survey by the Insurance jurop organization showed that 39 percent of respondents do not save for retirement – that number is even higher among women and workers over 50 years old. And many who do so are dissatisfied with the savings conditions.

Low incomes and inflation

“During the last decade, the pension crisis in Europe worsened significantly due to low real incomes of pension funds that were not enough to outpace inflation,” Arno Udmon, director of communications at the Brussels-based organization Better Finance, told DW. “This has resulted in a significant loss of purchasing power for savers”.

An analysis by the Finnish Pension Center showed that the nominal income of private pension funds around the world was eight percent on average last year. However, after taking into account decades of high inflation that followed the declaration of the coronavirus pandemic, a real number of only two percent was obtained.

Eurozone inflation peaked at 10,6 percent on an annual basis in October 2022.

When it comes to private pensions, that is, voluntary pension funds, they often do not give satisfactory results due to the insufficient transparency of the companies for managing these funds, both in terms of their costs and when it comes to the fees paid to them. That’s why even with such funds, “catching up” with inflation is a big problem.

Slow introduction of portable EU pension

In March 2022, the EU introduced the Pan-European Personal Pension Product (PEPP). It is a plan that allows workers to provide themselves with an additional pension that is fully portable when moving to other EU countries. The plan is available to everyone, but it is not binding.

However, the plan was introduced by only one country – Slovakia. “PEPP has been in force for two and a half years,” said van Merten, “but large investment funds say they don’t have the capacity to introduce PEPP themselves and are looking for partners for that.”

According to some experts, the problem is also that PEPP is too complicated. PEPP is also seen as undesirable competition for investment funds such as Blackrock or Fidelity, whose biggest clients are large Dutch, Norwegian and German pension funds representing tens of millions of European savers.

Van Merten is in favor of simplifying and making PEPP more flexible, as some EU countries do not give the pension plan the same tax benefits as other private pension plans.

Several industries in the EU – from Germany’s chemical and metal industry to France’s national rail operator – have occupational pension plans. Almost 60 percent of German workers who pay social security are covered by such plans. They often allow savers, especially people who work physically demanding jobs, to retire earlier.

Workers demand greater pension flexibility

However, people need even more flexibility when it comes to their investments and retirement age. The emergence of neo-brokers such as Robinhood, eToro and Germany’s Trade Republic, which allow users to manage investments via smartphone apps, has somewhat replaced many of Europe’s complicated and cumbersome pension systems.

Traditional financial providers argue that mobile investment apps encourage users to take unnecessary risks they don’t know enough about and that could jeopardize their long-term returns, while proponents of the system claim it has made investing simpler, cheaper and more transparent.

In the future, more EU governments could allow workers to invest part of their state pension savings directly in the stock market, as is the case in Sweden. Van Merten believes that workers would be more motivated to save if they had more control over how their funds are invested.

“Do you want your savings to be green? Do you want to invest in Israel or not? Let the individual decide. Why should social partners or unions decide that for you?” he asked, referring to private pension plans that are not controlled by the beneficiaries themselves.

Arno Udmon from the Better Finance organization warns that the day will come when the focus of the process will shift from public to private pension savings systems, and that savers are not ready for that. “There is a high probability that the next generation of Europeans will retire significantly poorer and later than their older peers,” he said.

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