The EU publishes reports from time-to-time that look at the long-term estimates of future pension costs, both public and private (in the latter case, only for some countries). This 20009 report summarises each country’s pension system and recent reforms and then gives expenditure estimates to 2060. The main influencers on changes from the 2001 and 2006 reports are then noted. The projections are based on the legislation and policy position as at July 2008.
“The 2009 Ageing Report was the third update since 2001 of the long-term economic and budgetary projections aimed at assessing the impact of ageing population. This projection exercise builds on, updates and further improves the previous exercises so as to enhance comparability across countries, consistency across expenditure items and the economic basis for the underlying assumptions.”
Because of “significant differences among EU Member States’ pension systems”, the report uses “country-specific projection models” but with a common set of assumptions “to guarantee comparability of the projection outcomes.”
Most of the report is about public pension systems because “The large majority of pension systems in the EU Member States are public pension systems.” (and most of those are Defined Benefit pensions, financed on a PAYG basis).
Most countries (18 of 27) have “…indexation rules for pensions that do not fully reflect development in nominal wages…” They use either price movements or a combination of wages and prices or, in Portugal’s case, a mix of GDP growth and prices.
Six countries have a “sustainability factor” that allows benefits to change. “This approach introduces a component that changes the size of the pension benefit depending on expected demographic changes such as life expectancy at the time of retirement.”
In most countries, the average retirement age is before the State Pension Age. That applies in 16 countries for males and 14 for females of the 21 countries that gave both sets of information.
As to expected costs of public pensions, the average expected increase is 2.4 percentage points (PP) over the period to 2060 with a wide spread from a 2.8 PP reduction in Poland to a 15.2 PP increase in Luxembourg.
The report was unable to analyse private provision though suggested that “In light of fiscal pressures arising from demographic trends, many countries have taken steps to encourage the creation of occupational and private pension schemes.”
PensionReforms notes that private provision matters just as much as public when assessing the long-term economic impacts of ageing populations. Both private and public pensions are claims on economic output and, in the end, it will be the strength of the local economy that determines whether a pension claim (private or public) can be met. Shifting pension claims from public to private makes no difference to ‘affordability’.
Also, countries may think they have limited future cost increases by changing the basis on which public pensions are re-valued. As the UK has discovered, limiting increases to movements in prices may work for a while, even for quite a long while but eventually, a measure that links pensions to society’s prosperity becomes inevitable. (File size KB; 412 pp) 723