While the pension crisis might not be the top topic in the upcoming EU Parliamentary election in June 2024, for national elections, it is on the top of the agenda. Yet the solution might lie outside of politics. A new paradigm is needed. Instead of looking to the state to finance the pension system, the younger generation should be given the tools to be financially savvy to start planning for his or her own pension.
Eimhin McGann
6 June 2024
French version | German version
Europe is faced with a shift in demographics and with a pension crisis. According to Tommy Bengtsson of the Centre for Economic Demography at Lund University, the worldwide share of people aged 65 years and above is to increase from 7.5 percent in 2005 to 16.1 percent in 2050.
The decline in fertility, given the huge increase in life expectancy in the Western world over the last century, has led to an imbalance of workers to dependents, straining pension resources and raising state healthcare costs. The European Commission’s annual 2024 Ageing Report has found that the population of the EU is set to fall, while the ratio of retirees to workers is set to rise.
According to the European Central Bank, pensions in most Eurozone countries consist of three pillars: pensions sponsored by the government, occupational pension schemes, and privately held pensions. While private pensions are held by a small minority, occupational pensions are a critical supplement to the state-provided pension. For example, in the Netherlands, the occupational pension exceeds 200% of GDP. Within occupational pensions, there are two types: defined contribution (DC) schemes and defined benefit (DB) schemes.
In DC schemes, returns on investment are not guaranteed, and the financial risk is borne by the retiree, not the company managing the retiree’s money. DB schemes offer a fixed income to retirees. While more secure than DC schemes, DB schemes are vulnerable to low interest rates.
Falling interest rates since the 1980s have left DB policy holders with not sufficient income to cover their pensions. This has led many pension funds to switch towards DC schemes which will have a significant impact on the pensions of the Eurozone. While DC schemes may earn higher returns than DB schemes, they are subject to less regulatory restraint, exposing retirees to the tumultuous financial markets. This increased financial risk comes at a time of rising energy costs, subsequent inflation, following Russia’s invasion of Ukraine and the quantitative easing of measures implemented during COVID.
Rising labor force participation of older workers who continue to work beyond the pension age and increasing the retirement age for future generations are some of the measures European states are implementing to tackle the pension crisis. Passing legislation to raise the pension age is a slow and tough process for many European states which is being met with much resistance from labor unions and Europe’s populist politicians on the left and right. One prominent example of this is the fierce opposition in France by trade unions.
One possible solution to the pension crisis lies in the ‘Silver Economy’, defined as the part of the economy dedicated to the needs and demands of older adults. Seniors together with older professionals (45-64 years) are the wealthiest age group in the world. The rise of the Silver Economy is not due to the fact that older people are inherently richer but because rich countries are older and poor countries are younger.
Ageing in Europe can thus be an opportunity for business and investment. Experts predict that the Silver Economy will grow another 3.2 percent per year by 2030. EU initiatives to raise awareness of the potential of the Silver Economy, such as a 2018 European Commission study, predict that this segment could be worth 5.7 trillion euros in 2025.
An ancient Chinese proverb said: “The best time to plant a tree was 20 years ago. The second best time is now.” The wisdom in this saying could apply to the pension crisis. As people live longer and stay healthy and active for longer, the danger of outliving their own savings increases. This fear was the number one fear cited in a 2023 GOBankingRates survey, named by about two-thirds of respondents.
Perhaps the time has come for a new paradigm on the part of the younger generations. Since the state will no longer be able to provide all the social benefits (including pensions) moving forward, each person must start planning for their own pension in their youth. Education about financial investments should be part of every high school curriculum. Young adults should use this challenge to become financially savy to plan for their own future and this financial plan should start now.
