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The Matthew Barrow story is playing itself out across the European Union. Many European state pension systems are facing a nasty crunch: as the baby-boom generation ages, the number of retirees is increasing, but because of declining birth-rates, there are not enough workers coming through the system to support them. With time running out and deficits mounting, governments have been searching for ways to alleviate their pension burden — from raising the retirement age to reducing benefits to placing more emphasis on corporate and individual pension plans.
Needless to say, this is not a popular activity. Unions and soon-to-be pensioners have mounted vociferous campaigns to preserve the status quo. As for the younger, often cash-strapped generation of workers, like Barrow they tend to have more important savings priorities — even though when they retire in a few decades time, it is they who will bear the brunt of the pension time bomb. Indeed, the abundance of information on the issue seems to have had a demoralizing effect instead of a motivating one. "The system is broke, and by the time I retire, it will be more so," says Volker Leprich, 34, a musician from Cologne. Lisbon graphic designer Maria Cale, 32, has an equally pessimistic view of her retirement benefits. "What I get will be so small," she says, "it won't even pay the phone bill."
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What would Otto von Bismarck — the Iron Chancellor who unified the German Empire — make of this state of affairs? It was Bismarck who came up with the concept of a state pension system in the 1880s, to protect old people from intractable poverty. His approach was hardly based on entitlements or handouts — he set the retirement age at 70, well above the life expectancy of the time. But when Europe's governments redesigned their pension systems after the devastation of World War II, they decided not simply to shield their elderly from poverty, but also to ensure that their standards of living did not drop when they retired. Such largesse was to be funded by the tax contributions of the younger, working members of the population — who not incidentally were in plentiful supply. The pay-as-you-go system was born.
But sweeping changes in European demographics are placing pay-as-you-go systems under unbearable pressure, as the ratio of workers to those-who-have-worked declines. In Italy in 2000, there were 270 pensioners per 1,000 working-age people: by 2050, that ratio is expected to rise to 667 per 1,000. What happens in the demographics gets reflected in the economics. In 2,000, Germany's expenditure on state pensions — roughly $220 billion — stood at about 11.8% of GDP, according to the O.E.C.D, while in Greece, the figure was 12.6%. By 2050, the German state pension spend will rise to about 16.9% of GDP. And Greece? An eye-watering 24.8%.
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