Demographic Time Bomb Threatens Pensions in Europe

[HenryTo]

November 26, 2004
Demographic Time Bomb Threatens Pensions in Europe
By ALAN COWELL

RIGHTON, England, - With his crisp gray suit, white shirt and a lapel poppy commemorating the end of the First World War, Chris Shergold does not exactly look like a vision of the future.

But, for many in Europe, his story is slowly becoming theirs, reversing the assumptions that this old continent has finessed life's travails so well that its people might look forward to ever shortening working lives in ever greater comfort.

In 1997, Mr. Shergold, now a 61-year-old former banker, was forced into early retirement by the merger of his employer with another bank. At the time, that seemed fine: he had a company pension, the likelihood of part-time office work and a nest egg of investments. It looked as if the combination would provide a generous retirement, with vacations in the sun and a good life at home.

Then, in 2000, the stock market crashed. Now he has returned to work full time as a financial manager for a nonprofit organization, where he expects he will have to stay until he is 67 merely to return to the levels of prosperity he envisaged seven years ago. In other words, he said, he found "that there's no sort of golden, shining cloud coming along at the end of the day."

Mr. Shergold's story goes far beyond the gravelly beaches and amusement pier of this southern English resort that has been his home since 1976. It represents a cautionary tale for the baby boom generation in many parts of Europe as aging societies from Sweden to Spain - and across eastern Europe as well - confront a demographic time bomb. With ever fewer young people to work and pay taxes, the cost of looking after growing numbers of older people with state pensions akin to American Social Security becomes ever more prohibitive.

The dream of early retirement on a fat pension is receding with other comfortable visions of the future, like the pursuit of shorter working weeks and expanded leisure time that preoccupied many, particularly in continental Europe, in the 1990's.

"They got used to having that very cushy social system, and now they are slowly coming to grips with the fact that the cushy system doesn't hold any more," said Katinka Barysch, an economist at the Center for European Reform, a private policy research organization in London. Or, as Mr. Shergold put it, "the majority of people will just have to stay at work that much longer."

The alternatives seem dire.

In Britain, which offers Europe's least generous old age pensions, Adair Turner, chairman of the government appointed Pensions Commission in London said, "Our problem is that we are going to have a whole lot of very poor pensioners in 30 years time." And in much of continental Europe, where years of social legislation have guaranteed pensions of as much as 70 percent of average retirement-age paychecks, Mr. Turner said, the continent "is going to have reasonably well-off pensioners supported over a number of years that society cannot afford."

As a result, European generations after the baby boomers will have to save more, pay higher taxes and work longer to maintain the kind of retirement comforts they once considered their due.

To be sure, this is not - for most Europeans - a drama of Dickensian deprivation. Consider the case of Marie Claude Hourcade, 55, who lives in Paris and retired last February from her job as an inspector in the French customs service.

As a mother of three - a relatively large family by European standards - and a government employee, she fell into a small category of people whose retirement benefits left even her amazed.

Her pension, she said, gives her the equivalent of about $3,000 a month which, added to the salary of her well-paid husband, offers an affluent life.

"The money enables me to have extras," she said. "I go to the theater a lot, I see exhibitions, we have a house in the countryside where we spend the summer."

Along with countries like the Netherlands, Sweden, Germany, Italy and Spain, France ranks among the most generous of state providers with retirees expecting their pensions to be some 70 percent of their country's average earnings. (The least generous is Britain, with just less than 37 percent, compared with 45 percent in the United States, figures from Britain's Pensions Commission show.)

But it is precisely that level of generosity that will be challenged as Europe's population ages and ever fewer working people pay the taxes to finance the soaring numbers of baby boom pensioners.

Today, according to European and United Nations figures, people of working age in Europe outnumber people of retirement age by about three to one, compared with a ratio of about five to one in the United States. By 2050 in Europe, by these estimates, the figure is set to be two to one.

This poses enormous problems. Italy's 18 million pensioners are used to drawing generous payments after 35 years at work. But faced with one of Europe's lowest fertility rates and biggest pension bills, the government of Prime Minister Silvio Berlusconi plans to raise the retirement age by five years starting in 2007. Germany, with almost 20 million pensioners, plans to reduce the size of state pensions compared with the average worker's salary.

With 12 million pensioners in 2000, France, too, plans to increase the number of years people must work to qualify for pensions. Even in the so-called new Europe of former Communist countries that joined the European Union this year, a pensions crisis looms because of low birthrates. "Anyone who talks about 'old' Europe and 'new' Europe on this is failing to recognize that it's a global problem," Mr. Turner said.

Of course, nuances exist. Unlike most of continental Europe, Britain has traditionally relied on its people to augment modest state pensions by saving for their old age through private and company pension funds. But, in recent years, pension funds have lost tax breaks worth some $9.5 billion a year, stock market declines have eroded portfolios and savings have given way to a huge surge in private debt, partly because of a booming housing market.

As private companies have limited access to generous pension plans, more than 12 million people in Britain - one-fifth of the population - "are not saving enough for retirement," the Pensions Commission said.

The idea of people working longer seems a simple panacea. After all, people generally remain healthier for longer and working until, say, 67 instead of 63 or 65 may not be such a burden. But that presumes that jobs exist for older people.

In Berlin, Brigitte Beyerdörfer, like many Germans over 50, particularly those from the former East Germany, has found that economies are not quite so obliging.

Her husband, Klaus, is a 62-year-old former truck driver who had been paying into state pension plans in East and West Germany for 46 years. But he had been receiving unemployment benefit for a statutory maximum of three years when he was obliged to go into premature retirement last Sept. 1. That brought him a reduced pension of around $1,000 a month.

Mrs. Beyerdörfer said she takes home around $1,800 a month from her work at an employment agency in Berlin. And so, after paying bills, like the monthly rent of around $520 for their 600-square-foot apartment in the former East Berlin, the Beyerdörfers manage relatively well. The problem, though, is the job market, as it is in other parts of continental Europe where economic growth is sluggish to say the least.

With unemployment in the former East Germany running at around 18 percent, "if I lost my job here I wouldn't find another," Mrs. Beyerdörfer said. "All my friends are already sitting at home. We have never thought it would be so difficult to find jobs."

Moreover, to qualify for a full state pension of $1,560, she said, she would have to work for another 10 years to reach 65. "As long as I work it's O.K.," she said. "If I can't, it's going to be pretty tight."

[Dubious]

Henry,

Thank you! For some reason I can not remember that name??? . That is a hard one to wrap your mind around.

Wait until the airlines and Amtrak - get on board and dump their pensions off on them.....GM here we come....

Hate to be negative...there is really not that much to be positive right now from an economic standpoint - oh Greenspan has 10 months left and I hope he lives to be 120 so he can see what he did to the United States (not that I think he cares) but will give me comfort to know he is alive to see the after effects of his policies.

Dubious

[HenryTo]

Dubious,

The name of the agency is the Pension Benefit Guaranty Corp - or the PBGC for short.

http://www.pbgc.gov/

They also have a press release section where you can watch the upcoming train wreck in slow motion :

http://www.pbgc.gov/news/press_releases/default.htm

As of the end of the 2004 fiscal year, the program was $23.3 billion in the red:

http://www.pbgc.gov/news/press_releases/2004/pr05_10.htm

[Dubious]

Yes I believe the normal (I do not have time to research this) lifespan was 63 years then. So most folks never got a social security check. Remember during the 1930s we were a manufactoring based and farmer based economy (lot of hard labor and lots of accidents). Now we are a paper pushing economy and if we lift anything heavier then our paycheck we whine .

Most of these corp retirement plans we be pushed off to the government (darn can not remember the agency name right now????), i.e. taxpayer - which will further add to the budget debt. You think social security is a "crisis" look at medicare. Finally the U.S. public has woken up to the "we got a crisis" and "here is YOUR solution" crap that was forced down our throats in the very, very recent years past . Good on em. The sheeple are coming out of their zombie state and have poked their heads up from their grazing ways.

Problem with personal accounts....even if you do well, you will be ravished by inflation (lose of purchasing power). Remember if you had 100K in the 1970s you could retire. Now in the 2000s if you have 100K - big deal you are 25th of the way there. That is the sad state of affairs for the USD. Guess what? In 10 years have a wheelbarrow full of $100 USDs and I will take the wheelbarrow - because "things" hard assets value will hold up and the USD will be worthless. However the hard asset rule for property (house or land) will not apply . They will return to their correct prices - which is good. Only thing that would of supported the double digit increases in housing prices would be double digit wage increases. Mr Bubbles - you are a treasure. Crash, boom, baa.

That is why they call me...

Dubious.

[HenryTo]

One can see that DB plans as a group are continuing to die a very slow and painful death. Not unsimilar to watching a giant train wreck in slow motion. Even companies with a huge cash war chest (such as MSFT, INTC, CSCO) will not start up a DB plan b/c it is now obvious what the long-term consequences are.

Fact of the matter is that as a group, Americans going to have to work longer and for more of their lives before they can retire. The normal retirement age of 65 was implemented during the 1930s and was not meant to support retirees into their 80s or 90s. Self-directed accounts will not work either - made worse by the fact that individuals have historically underperform the general market and will continue to underperform the market in the future.

Henry

[Dubious]

You could replace "Europe" to "the United States".

A lot of corporations want to dump their pension obligations...NOW. Pensions have become a massive ball and chain . Wonder why we outsourced our manufactoring base?