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Pensions, a sustainable future

Daniel Gros, Director of the Centre for European Policy Studies: “No emergency: technology and health will extend working life”

Europe is the Old Continent in more ways than one, especially when we consider its demographic make up: the average age of the population is increasing as birth rates are falling.  Looking to the future are the EU countries’ pensions systems in danger of becoming unsustainable? We asked German economist Daniel Gros, 63, director of the Centre for European Policy Studies (CEPS), the authoritative think tank headquartered in Brussels.

Europe is experiencing a dual phenomenon: an aging population and falling birth rates. Now that the baby boomers are reaching pensionable age, the number of working-age people (15-64) is falling drastically. In 2008 there were four working-age EU citizens for each pensioner aged over 65. By 2060 this proportion will have fallen to two to one. How sustainable is the pension system in the long term?

It’s true, these dynamics are key to the relationship between those retiring and those entering the employment market. The former group is increasing in number and will continue to increase, while the latter group is declining. But there are other factors that do not always receive the attention that they deserve, factors that are keeping the framework balanced, at least for the time being. Potentially, however, there are also more workers because the employment rate, among the group of working age people in the European population would appear to be increasing.



Already those are approaching pensionable age today are better educated and qualified than the generations that went before them: they are people that can work for longer because life expectancy has increased thanks to developments in technology and training. Furthermore, jobs are less physically strenuous that they once were. So, while once the rate of employment among the 50-65 year-old group was low, now it is high and this will continue into the future. When the youngsters of today reach pensionable age they will have had far fuller and more continuous working lives compared to the generation that is now aged 50-60 years old, in addition to having enjoyed better health. Therefore, it will be easier to keep these people, continuously and for a long time, within the perimeter of the workforce.


Is this a scenario that concerns Europe in its entirety?

Yes, but in a particularly accentuated way in the South. Here the difference between the level of education of thirty year olds today compared with people now in their sixties, is more marked than in the rest of the continent. We can see in the case of Italy, where amongst young people the proportion of graduates is 30-35 %, while for those approaching retirement the figure is 10%.


So you are optimistic, in difference to many experts that are predicting a dark future?

It’s not a question of being optimistic. It’s only that the estimates and the projections indicate that in the coming years, until 2025, the system will remain in equilibrium. After 2025 the problems will arrive, albeit in a gradual manner.


In order to make pensions sustainable, Europe advises a series of measures, including an increase in birth rates.
Birth rates are important, however, in order to measure the impact of policies for demographic growth, a long time is needed, a very long time.


Can immigration also play a key role? And if so, can you calculate the flow of foreign workers we will need between now and 2030?

In my opinion the arrival on the continent of non-European citizens and their absorption into the workforce does not radically change the scenario. Let’s be clear, if in the space of ten or fifteen years we didn’t have immigration then the consequences would be negative. But from a more long-term point of view we have to consider that immigrants too will need to draw a pension so the theory that they will be the ones to shore up our pension system is not plausible. Moreover, these immigrants have a lower average life expectancy than the European population. In summary, the impact of immigration on the social system is positive but not so significant.


Europe also advises the further development of complementary pensions. Do you agree with this?

Its right to attempt this route but there are no guarantees that it will function. Today the world has an abundance of savings, the yield from which is very low. Savings should be invested outside of Europe in foreign countries but an analogous situation exists in the rest of the world, for example in China and Japan. With this scenario the yield of integrated pension funds will be low.


The OECD, Eurostat and the IMF have often repeated that the cost of public pensions in Italy, compared with GDP is around double the average of other EU countries. Is this really the case and if so, how can the situation be remedied?

Italy is a particular case. Social costs are high, as has been noted, but also distributed inefficiently. There should be some cuts to the many pensioners that are not badly off, providing something to those who, on the contrary, have a very bad time of it.