Pension reform is long overdue in the Western World. As the bulk of people get older, society’s economic stability and social structure will become more dependent upon pension systems. Such systems provide long-term capital for industry and contribute to economic growth and job creation. The development of private pension provision can also play an important part in addressing rising national debt as it reduces the reliance of the population on state pension benefits. The success or failure of such a theory depends on whether individual workers have a sufficient level of pension savings that would allow them to replace their final year of salary when they retire. Across EU countries, Sweden and the Netherlands come closest to achieving this, with workers enjoying a level of pension income of circa 90% of individual earnings at the moment of take-up of retirement. The UK and Ireland do not fare as well with pension replacement coverage at 45% and 40%, respectively; meanwhile, France currently has a coverage ratio of circa 17% of individual earnings upon retirement.
Pension reform in the and workplace
As the economic environment changes, so too does EU Member State governments pressure to address any imbalance in their finances. The situation has not been helped by the recent EU Stability and Growth Pact, which outlined policy commitments to foster competitiveness, raise employment, and reinforce financial stability. The new agreement by European ‘heads of State’ has encouraged governments to focus on a deficit ceiling of 3% of GDP and a gross debt limit of 60%.
This approach, however, is likely to trigger adjustments in national pension systems and harm pension savings, resulting in the burden of aging being shifted onto future generations. The promotion of sustainable pension systems has always been an important part of a nation’s broader economic strategy. Unfortunately, the ongoing financial crisis has left many countries struggling to jump-start their economies; it appears that national pension policies are in the government crosshairs once again. The State coffers may profit from any short-term pension reform but are likely to pay dearly for it afterward. Already in Europe, there are signs of countries retreating on their pension commitments:
- In both Hungary and Poland, the governments have opted to transfer mandatory privately funded pension assets back into the state system to tackle its deficit.
- In Ireland, the pension reserve fund assets were used to recapitalize the failing banks. An additional annual levy of 0.6% is now to be charged on domestic pension funds, the proceeds of which are to be used to stimulate the employment market and fund construction projects.
- In the UK, the private pension sector has been hit by a reduction in tax relief on contributions. It has also moved the link of public sector pensions from the Retail Price Index benchmark to that of the Consumer Price Index, reducing expected pension payments by up to 25% over a lifetime.
- In France, the government increased the retirement age for drawing state pensions from 60 to 62 and raised the age of entitlement to a full pension from 65 to 67.
An age of revolution
In this new age of revolution, the internet is the weapon of choice of the masses and information the bullets that load the gun. This means that the structure and management of pension systems need to be more transparent than ever. As a result of ever-changing rules, only the well-informed tend to understand where they stand; there are thus a lot of worried people along the pension food chain. No one has the power to see through the Matrix of government pension reform processes…. it is, however, expected that any such reform is connected to the people it represents.