TIME EUROPE
May 29, 2000 VOL. 155 NO. 21
Stayin' Alive
With their fiscal health threatened by a demographic time bomb, the governments of Europe struggle to fund the pensions of future retirees
By CHARLES P. WALLACE Frankfurt
Olof Björlin and Sepp Sigulla offer an intriguing glimpse into Europe's future. Although they have never met, Björlin and Sigulla are part of the most significant lifestyle trend in centuries. Both men are retired, among the swelling ranks of Europeans enjoying comfortable lives on generous pensions provided entirely by the welfare state. Sigulla, 69, a former union representative in Maintal, a suburb of Frankfurt, owns his own four-story apartment building and earns more on his old-age pension than he did in salary. Björlin, 71, a retired lawyer in Stockholm, regularly flees the Nordic cold for vacations in sunny Italy. "I'm quite happy," says Björlin. "I'm living well."
They are members of the first generation in modern times to enjoy their golden years in such comfort. Unfortunately, it's probably the last as well. In another 30 years, as the number of retired workers like Björlin and Sigulla multiply thanks to the aging of the baby boom generation, Europe will face an unprecedented financial crisis. The number of pensioners is rising sharply, and the number of workers is shrinking. It's a demographic time bomb. When it goes off, the European system of state pensions faces drastic choices: either cut benefits sharply or make people work far longer than they do today. Or both.
Björlin and Sigulla also illustrate how differently European countries have responded to the looming crisis. Sweden, where Björlin has been drawing a pension for six years, started planning for the geriatric explosion in 1992, finally putting into place a complete overhaul of its pensions system last year. The new arrangement, employing a new way of treating pension contributions, is designed to encourage people to work longer to help guarantee a sound financial footing for the pension system. Germany, where Sigulla retired seven years ago and where the proportion of people over 65 is growing faster than anywhere in the world — by 2040, the number of the country's over-65s is expected to almost double to 30 million people, up from 16 million today — has yet to adopt or even begin to develop a political consensus to reform the deficit-ridden state pension system.
Germany isn't alone. Both France and Italy face a budget crunch to finance generous state pensions. Rail workers and firemen in France can retire at the still vibrant age of 50. Until a loophole was closed recently, women in Italy with state jobs could retire with as little as 15 years in the job. Yet both countries have dodged a timely overhaul of their pension systems for political reasons. In France, Prime Minister Lionel Jospin has delayed reforming costly civil service pensions, apparently out of fear of damaging his chances as a presidential candidate in 2002. In Italy, the government was even more cynical, adopting a far-reaching pension reform program similar to Sweden's in many respects, but implementing it so gradually that it shifts the burden of paying the lion's share of the costs from today's workers to the generation that begins to retire in 2040. "They're going to realize how much they're paying for my generation, and what lousy pensions they themselves are going to have," says 58-year-old Giuseppe Pennisi, an economics professor in Rome.
The U.S. financial firm Merrill Lynch concluded in a recent study that the effect on public pension spending could be extremely negative as the population of retirees grows. Not only do states have to pay for the pensions, but there will be sharply higher health care costs as well. Social security costs in Germany, for example, are expected to rise from 30.8% of GDP in 1980 to 47.4% in 2040, while France's social costs will rise from 28.3% to 37.4% of GDP. As a recent European Commission study concluded, the large increase in the proportion of the economy that must be spent on retirement "raises concerns regarding the long-term sustainability of pay-as-you-go pension systems."
How could Europe get in such a mess? After all, when the state pension was invented in Germany a century ago by Otto von Bismarck the retirement age was set at 65, far above the average life expectancy at the time. And the primary goal was to insure against old-age indigence. But when European governments began redesigning their pension systems after two world wars and the longest depression in history, most decided in the 1950s to offer pension systems that went way beyond the idea of simply shielding the oldest members of society against poverty.
Instead, the new pensions aimed to guarantee that workers' living standards would not decline after they retired. Unlike some plans in the U.S. and Switzerland that forced workers to save for a rainy day, most of the new European systems paid benefits out of annual payroll deductions or tax rolls, the so-called pay-as-you-go system. The first generation of retirees collected generous pensions without ever having contributed a franc. The system survived because there were lots of young workers and relatively few elderly.
A sharply falling birthrate in Europe is gradually turning that system upside down and making it untenable. According to a study by the European Commission, the ratio of people 65 and over to the working population is expected to rise from 85% in 1995 to 124% in 2050. Richard Disney, an economist at Britain's Nottingham University, pointed out recently that the present system, in which the financing of gradually accumulating pension liabilities is left to future generations, "bears much the same character as the schemes of Charles Ponzi, an originator of the use of chain letters to raise money."
Two other statistics make the picture even bleaker. First, the actual age of retirement has been steadily falling because of early retirement programs designed to combat unemployment and because of easy-to-get medical pensions for the allegedly infirm. In Germany, for example, the legal retirement age is 65 — the same set by Bismarck in the 1880s. But the average age when people retire has fallen to 59.
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May 29, 2000
COVER
Beyond 2000: A New World of Work
EUROPE
Shell-shocked
Angry Dutch residents want answers after a fireworks factory explodes in the middle of their neighborhood
Power Grab
Putin reveals his leadership plans
Rebel Yell
Serb protests against Milosevic's media crackdown kick-start opposition leaders into action
Campaign of Terror
Greece is second only to Colombia in its number of anti-American terrorist attacks
Viewpoint
The E.U. needs a constitutional framework
AFRICA
Ray of Hope
A warlord's capture sparks jubilation in Freetown
BUSINESS
BooHoo.com
A much-hyped dotcom has gone belly up. How many more will follow?
TIME FINANCE
The Pension Problem
As the number of workers to support retirees dwindles, Europe's governments must face a looming financial crisis
Your Money
Rules for planning your retirement
Viewpoint
The early bird can't always expect success
DEPARTMENTS
To Our Readers
World Watch
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