Will Europe Raise the Retirement Age?

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Ian Langsdon / Pool / Reuters

Britain's Prime Minister David Cameron picks up a veteran's cane as he and France's President Nicolas Sarkozy (2nd left) leave the Royal Hospital Chelsea in London

For Europe's millions, it's apt that their home is known as the Old Continent. Europe is aging. Thanks to higher life expectancies and lower birth rates, overall population growth is slowing and the average age of Europeans is creeping upward steadily. All of which is putting intense pressure on Europe's generous state-pension systems. On Wednesday, the European Commission announced plans to reverse the drift threatening the continent's social model, in a move that could see Europeans forced to stay in work longer.

Although the population of the European Union passed the 500 million mark last summer, it is peaking: the numbers are projected to plunge over the next 40 years by 50 million, the equivalent of the current populations of Poland and Greece combined. At the same time, life expectancy has been rising by two or three years for every ten that pass. By 2050, Europe will have almost twice as many people aged over 65 as under 15.

The consequences of this social time bomb are predictable. Europe's pay-as-you-go pension schemes that force today's workers to finance yesterday's workers' retirements are now equal to more than 7% of GDP, and that could double by 2050. If pensions systems continue to be based on the assumption that workers hugely outnumber retirees, they are headed for collapse.

In an attempt to tackle the issue head-on the Commission unveiled a green paper of policy ideas on Wednesday, and launched a Europe-wide debate on how to ensure that the current public pension schemes remain viable. The paper warns that reforms — covering labor markets, social systems and public finances — could be painful for everyone, and no single remedy will be enough. But it also insists that business, governments and Europeans themselves have to address the problem with some urgency.

"The current situation is simply not sustainable," said E.U. Employment and Social Affairs Commissioner László Andor at a press conference on Wednesday. He noted that while many E.U. governments have been reforming their pension systems to varying degrees, the economic downturn has aggravated and amplified the impact of the latent demographic trends. "From 2012, the working-age population in Europe will begin to shrink. The choice we face is poorer pensioners, higher pension contributions or more people working more and longer," Andor said.

While Andor did not specifically call for the retirement age to be raised, that is likely to be the single most effective measure that emerges from the reforms. If Europeans want to retain their public schemes, he said, then it seems inevitable they will have to work longer. On average, Europeans retired at the age of 61.4 in 2008, up from 59.9 in 2001. That varies across the E.U., with Romanians generally retiring at 55.5, and the Irish at 64.1.

Aware of the potential threat to their pension schemes, several European countries are already raising their legal retirement age. In Ireland and the U.K., the retirement age will rise to 68 by 2028 and 2046 respectively. The Spanish and German governments are eyeing 67 as the new retirement age, from 65 today. But such reforms are sensitive, even in the midst of the current economic crisis: French plans to raise the retirement age from 60 to 62 by 2018 brought workers into the streets in protest.

Martin Gasche, from Germany's Mannheim Research Institute for the Economics of Aging says there are essentially four pension policy options facing Europe: raising contribution rates to the pension system; cutting pension benefits; cutting the share of pay-as-you-go pensions in favor of private funds; and raising retirement age. "All these changes are extremely unpopular with workers and voters," he says. "But while pension reform is the third rail in politics, it is a necessity."

One particular trend E.U. officials want to quash is the casual removal of older workers from the labor market with early retirement, in the belief that this frees up jobs for younger people. But this is based on simple prejudice, says Anna-Sophie Parent, director of the Brussels-based AGE Europe, a group representing the elderly. "People who wish to should be enabled to work as long as they like, even beyond their official retirement age," she says, pointing out that Europe's elderly are healthier than their predecessors were, which means they could be more productive for longer. "If elder workers are empowered to remain in employment, they will help change mentalities and the ageist attitudes that still prevail in almost all E.U. countries," Parent adds. "The E.U. can no longer afford to waste any of its human capital."

Pensions need to be nourished by upcoming generations, and Europe's anemic fertility rate is a huge obstacle to the system's sustainability. "The bigger picture is that women have fewer children than before, as they find it difficult to balance work and children," says Sotiria Theodoropoulou, an analyst at the European Policy Center (EPC), a Brussels-based think tank. Theodoropoulou believes women are an untapped resource, and could be part of the solution. "We need to make it easier to give them career breaks," she says. "Countries that pursue progressive family and employment policies — like France, Iceland, Ireland and Norway — have a positive correlation between birth rates and working mothers, showing that no trade-off is needed."

Whatever policymakers decide as they grapple with the daunting challenges of Europe's changing demography, they should remember it is a great achievement that Europeans are living longer. But the payoff is that Europeans will have to work a little longer before they start planning their retirement parties.