Abstract
This chapter discusses the development of statutory first pillar pensions’ reforms within the fragmented European social policy regime. It provides a doctrinal analysis concerning the institutional and operational status of pension reforms, discussing the performance of national systems before and during the economic crisis. It also addresses issues about the critical dilemma between adequacy and sustainability in light of the sharp financial crisis that affects the European region, challenging the role of EU bodies and their impact on national pension schemes through institutional arrangements (community-binding law), new governance methods (the so-called social open method of coordination) and policy initiatives (as the 2010 Green Paper “Towards adequate sustainable and safe European pension systems” and the 2012 “European Year for active ageing and solidarity between generations”).
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- 2.
Statutory pensions in Europe follow the traditional global approach introduced by the ILO Convention C102/1951 concerning Minimum Standards of Social Security (the basic international text for defining and enumerating social security risks and benefits), which codifies a ‘classic’ typology of social risks (medical care, sickness, unemployment, old-age, employment injuries, maintenance of children, maternity, invalidity, loss of support suffered by the widow or child as the result of the death of the breadwinner).
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European Commission (2007a).
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Women tend to predominate among those with atypical contracts; they tend to earn less than men and tend to take career breaks for caring responsibilities more often than men. As a consequence, their pensions tend to be lower and the risk of poverty tends to be higher among older women, also because they live longer. While periods of care are recognised in some PAYG systems, this is less straightforward in funded pension schemes, with the question of how to finance such solidarity elements.
- 5.
These are pension schemes where the level of contributions, and not the final benefit, is pre-defined: no final pension promise is made. DC schemes can be public, occupational or personal: contributions can be made by the individual, the employer and/or the state, depending on scheme rules. The pension level will depend on the performance of the chosen investment strategy and the level of contributions. The individual member therefore bears the investment risk and often makes decisions about how to mitigate this risk.
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European Commission (2008a).
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These are pension schemes whose benefit promises are backed by a fund of assets set aside and invested for the purpose of meeting the scheme’s liability for benefit payments as they arise.
- 8.
According to the decision of EUROSTAT (The Statistical Office of the European Commission), these schemes are to be included in the private sector in national accounts because the transactions are between the individual and the pension fund. Thus, they are not recorded as government revenues or expenditure, and consequently, they do not have an impact on the government surplus or deficit. In addition, the insured persons have the ownership of the assets of the fund and, thus, they bear the risks and enjoy the rewards regarding the value of the assets. Furthermore, the EUROSTAT decision specifies that a possible government guarantee for such a fund is not an adequate condition to classify such schemes as social security (public) schemes, because such a guarantee is a contingent liability and these are not considered as economic transactions until they materialise.
- 9.
At-risk-of-poverty rates are defined in the EU context as the share of persons with an equivalised disposable income below an at-risk-of-poverty threshold. Equivalised disposable income is defined as the household’s total disposable income divided by its ‘equivalent size’ to take account of its size and composition. The at-risk-of-poverty threshold is set at 50 and 60 % of the national median equivalised disposable income. It must be noted that income generated from owner-occupied housing or housing beneath market rents—i.e., imputed rent—is not included in the definition of income. Inclusion of this element of income could make significant difference in the measurement of risk-of-poverty rates.
- 10.
On average, people aged 65+ have an income which is around 83 % of the income for younger people, ranging from 54 % in Latvia to more than 100 % in Hungary (2009).
- 11.
The main indicator is the aggregate replacement ratio. However, this only looks at pensions currently in payment. But given the long-term implications of pension reforms, theoretical replacement rates are useful as an additional analysis tool. This gives us the possibility to look at the adequacy of the replacement income provided by pension systems for theoretical cases. It also allows us to stress-test this adequacy by assuming macroeconomic shocks such as the change in rate of returns for funded pensions or by assuming career-breaks for individuals, for example in the case of unemployment.
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They refer to an indicator showing the level of pension income after retirement as a percentage of individual earnings at the moment of take-up of pensions or of average earnings. Replacement rates measure the extent to which pension systems enable typical workers to preserve their previous living standard when moving from employment to retirement.
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Only a modest recovery in the total fertility rate, which is the average number of births per woman over her lifetime, is assumed for the EU, from 1.52 births per woman in 2008 to 1.57 by 2030 and 1.64 by 2060. In the euro area, a similar increase is assumed, from 1.55 in 2008 to 1.66 in 2060. In all countries, the fertility rate would remain below the natural replacement rate of 2.1 births per woman that is needed in order for each generation to replace itself. This will result in slow growth and in most cases actual declines in the population of working age. The fertility rate is projected to increase in all Member States, except in the few where total fertility rates are currently above 1.8, namely France, Ireland, Sweden, Denmark, the United Kingdom and Finland, where it is assumed to decrease but remain above 1.85, or remain stable. The largest increases in fertility rates are assumed to take place in Slovakia, Poland and Lithuania, which had the lowest rates in the EU in 2008; here, the increase would occur gradually, approaching the current EU average rates only in 2060. See European Commission (2009b).
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This corresponds to a rate at which future pension benefits are built up. It is used in defined benefit schemes and based on the formula linked to the scheme.
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Life expectancy has been rising steadily, with an increase of two and a half years per decade in the countries holding the record of highest life expectancy. If the pace of future progress in the reduction of mortality remains the same as it has been over past decades, most people in the EU will live very long lives. For the EU as a whole, life expectancy at birth for men would increase by 8.5 years over the projection period, from 76 years in 2008 to 84.5 in 2060. For women, life expectancy at birth would increase by 6.9 years, from 82.1 in 2008 to 89 in 2060, implying a narrowing gap in life expectancy between men and women. The largest increases in life expectancy at birth would take place in the most recent EU Member States, according to the assumptions. Life expectancy for men in 2008 is lowest in Estonia, Latvia, Lithuania, Hungary, Slovakia, Poland, Bulgaria and Romania, where it ranges between 66 and 71 years. It is assumed that some catching up will take place, with increases in life expectancy of more than 10 years over the projection period—a bigger increase than in the rest of the EU. Overall however, life expectancy at birth is projected to remain below the EU average in all new Member States—except in Cyprus—throughout the projection period, especially for men.
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European Commission (2005a).
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Due to their nature, funded pensions—both defined-benefit (DB) and defined-contribution (DC)—tend to have such links and notional defined-contribution (NDC) schemes (as in SE, IT, PL, LV) are also designed in this way. But increasingly other public pension designs (e.g. AT, DE, ES, FR, PT) also have features where longer working lives feed into higher pensions.
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Many pension reforms (e.g. SE, IT, PL, DE, FI, FR, AT) have already introduced such mechanisms. While these measures may have little impact on retirement decisions, they can (if allowed to operate as intended) reduce pension benefits in relation to earnings and contribute to better alignment of expenditures with revenue.
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While in LV the reserve fund partially covers the deficit of the social security system, the reserve fund in IE was used as a means to help solve the effects of the crisis in the banking sector. Although this can be considered an effective use of resources in times of constraint, it is important to consider the long-term demographic pressures on the pension system. The use of funds earmarked for pensions can also lead to a loss of social confidence and acceptance for the pension system.
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European Commission (2010b).
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These are pension schemes where the benefits accrued are linked to earnings and the employment career (the future pension benefit is pre-defined and promised to the member). It is normally the scheme sponsor who bears the investment risk and often also the longevity risk: if assumptions about rates of return or life expectancy are not met, the sponsor must increase its contributions to pay the promised pension.
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In Latvia, the government intends to increase the retirement age from 62 to 65 by 2021. In Hungary, the retirement age will be gradually raised from 62 to 65 by 2022. In the Netherlands, the government has proposed that the pensionable age should rise to 66 years in 2020 and to 67 years in 2025, while there would be special provision for people who began their careers very young and those who worked in physically demanding jobs. In Slovenia, the government has disclosed a plan to increase the retirement age from the current 61 for women and 63 for men to 65 for both by 2020 (early pensions would be accessible from the age of 60 instead of 58). In Romania, the government is considering an increase in the retirement age from 58 to 60 for women and from 63 to 65 for men by 2014.
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Regulation (EC) No. 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social security systems (Text with relevance for the EEA and for Switzerland), OJ L 166, 30 April 2004, pp. 1–123.
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Regulation (EC) No. 987/2009 of the European Parliament and of the Council of 16 September 2009 laying down the procedure for implementing Regulation (EC) No. 883/2004 on the coordination of social security systems.
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Regulation (EEC) No. 1408/71 of the Council of 14 June 1971 on the application of social security schemes to employed persons and their families moving within the Community.
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Council Regulation (EEC) No. 574/72 of 21 March 1972 fixing the procedure for implementing Regulation (EEC) No. 1408/71 on the application of social security schemes to employed persons and their families moving within the Community.
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Council Directive 79/7/EEC of 19 December 1978 on the progressive implementation of the principle of equal treatment for men and women in matters of social security, OJ L 6, 10 January 1979.
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A ‘White Paper on Pensions’ is scheduled for the third quarter of 2011; it will identify the most important measures to be taken forward.
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European Commission (2010c).
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European Commission (1997).
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Pension spending has consistently been documented to pose a very significant risk to the long-term sustainability of public finances in Greece. On current trends, the projected spending on pensions in 2060 is expected to exceed 24 % of GDP and the estimated deficit of the social security system is estimated at over 15 % of GDP. In this respect, the Socialist government (in power since October 2009) decided to address the issue of pension spending through two kinds of measures during the implementation of the Financial Stabilisation Mechanism of the Greek Economy since May 2010: (1) policies that rationalise expenditure and increase the revenue base and (2) a radical institutional reform of the pension system.
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Amitsis, G. (2013). Challenging Statutory Pensions Reforms in an Aging Europe: Adequacy Versus Sustainability. In: Phellas, C. (eds) Aging in European Societies. International Perspectives on Aging, vol 6. Springer, Boston, MA. https://doi.org/10.1007/978-1-4419-8345-9_2
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