Pension Reforms in the EU since the Early 2000's: Achievements and Challenges Ahead
European Economy Discussion Paper No. 042
64 Pages Posted: 10 May 2017
Date Written: November 22, 2016
Most EU Member States have carried out substantial pension reforms over the last decades in order to enhance fiscal sustainability, while maintaining adequate pension income. The intensity of pension reforms has been particularly strong since 2000. These reforms have been implemented through a wide range of measures that have substantially modified the pension system rules and parameters. One of the most important elements of pension reforms, aside of whether countries engaged or not in a systemic change, has been the introduction of mechanisms aimed at automatically adjusting (indexing) the key pension parameters (pension age, benefits, financing resources) to demographic pressure (e.g. changes in life expectancy, increase in the dependency ratio). Indeed, since the mid- 1990's, half of the EU Member States have adopted either automatic balancing mechanisms, sustainability factors and/or automatic links between retirement age and life expectancy. All these pension reforms are projected to have a substantial impact on containing future pension expenditure trends. According to the latest long-term projections in the 2015 Ageing Report, public pension expenditure is projected to be close to 11% of GDP over the long run in the EU, almost the same as in 2013.
However, the fiscal impact of ageing is still projected to be substantial in many EU countries, becoming apparent already over the course of the next two decades. This is also due to the very gradual phasing in of already legislated reforms, an issue that raises questions about the intergenerational fairness of the reforms and poses some doubt on the time-consistency of their implementation. Indeed, the sustainability-enhancing pension reforms legislated in a majority of EU countries will lead to a reduction of generosity of public pension schemes for future generations of retirees. But to make sure that these reforms will not have to face political and social resistance and risk of reversal in the moment they start to be implemented in full, other "flanking" policy measures are likely to be necessary: for example, reforms that boost retirement incomes by effectively extending working lives and employability of older workers (also through flexible working arrangements that allow people to keep working beyond current formal retirement age and to step down gradually from full-time to part-time to very part-time work) and provide other means of retirement incomes (e.g. private pensions) and appropriate social safety nets to avoid that people fall into poverty in old age.
Keywords: Pensions, Ageing Population, Public Expenditure, Debt, Deficit, Potential Growth, Structural Reforms, Retirement Age, Older Workers, Longevity Risk
JEL Classification: H55, J26, J1
Suggested Citation: Suggested Citation