The Problems with Europe Part Deux: Pension Challenges and the Threat of Generational Warfare

Written by Investing Across Borders on November 22, 2012 in Europe

Orleans, France – Driving up Route E9 to Paris from southern France, it’s hard not to see the dozens of construction workers along the freeway. And when you get off the freeway in Orleans, there they are again – filling in potholes on city streets and diverting traffic around cones and annoying motorists.

This is new to France. Just a few years ago, there were not so many construction workers. And these construction workers cut across the dichotomy of French culture – both men and women, young and old, a broader mix of minorities. Although this year, there seems to be more gray-haired men and women thrown into the mix.

What’s wrong with this picture? Nothing, if you’re simply trying to fill a pothole. But economically, there is something very wrong indeed. They represent four challenges that France, and indeed all of Europe, have in common:

  1. People, and workers, are getting older.
  2. European governments, and the people of Europe, will have to foot the bill for the pensions of retirees.
  3. European governments would rather spend money on infrastructure projects than do the more politically challenging option – invoke austerity measures and cut entitlements.
  4. And four: In giving jobs to older Europeans, are we stealing jobs away from younger generations who could be more productive?

What’s happening now in Europe is indeed a global problem, and how Europe responds to these challenges could provide an interesting lesson for the United States and for other countries as well.

Addressing the demographics first, Europe’s population has undergone the same thing that the United States has: an aging population where the ratio of retirees to workers is expected to double by 2050 – from an average of four workers per retiree in 2006 to two workers in 2050. Currently, only 39% of Europeans between the ages of 55 and 65 work. Unless European governments pass laws to change that, the European workforce is expected to decrease by 14% by the year 2030.

In France, the government has been trying to change that, but it is challenged by a population that resists having to work longer but at the same time, sees no alternative. Most early retirement options were ended in 2003, and the minimum retirement age was lifted to 62 from 60 in 2010. Since taking office, President Francois Hollande has rescinded that for some of population, taking it back to 60, but for most people in France they have become accustomed to retiring later, on average at 62. That age could get older as the population ages.

France has a burgeoning problem in trying to meet the government’s swelling pensions. The European Central Bank (ECB) estimates that France’s state pensions liability amounts to 362% of current Gross Domestic Product – the highest in Europe, trailed only slightly by Austria at 360% and Germany at 330%. In France, the proportion of older workers aged 50-64 rose to 56.5% in the second quarter of 2012, up from 55.4% in the first quarter of 2008. That increase isn’t going to be enough to lessen France’s burden.

Countries like the United Kingdom and the Netherlands don’t have the state pension problems that France does, but that is only because they have shifted the problem of financing pensions from the government sector to the corporate sector. The U.K., like France and the rest of Europe, are still going to have the problems of an aging society and burgeoning pensions.

Europe is gradually adopting a U.S.-style solution that shifts the burden of financing retirements from the government and the private sector to the employees themselves in the form of defined contribution plans instead of relying on defined benefit pension plans. But there has been resistance to that across Europe:

Does forcing workers to save and invest in their own retirement alter their culture and lifestyle? Can the government rely on workers to do so, or will the government end up shouldering the bill? And what is it doing to the respect and dignity of seniors in Europe, where seniors have long held an honorable and respectable position in society?

Europe’s economic problems lately have only exacerbated this debate. All of a sudden, Europe has an increasing problem of unemployment among the younger generations, where the unemployment rate for those under 25 has shot up to 21% from 15% in 2007. Some of those jobs are going first to seniors, because with government entitlements starting later and later, workers have no other choice.

This raises the question: Are we forcing a system where the youth will begin to resent seniors who are stealing jobs that would otherwise go to them? And will it change the respect and honor that the youth of Europe have traditionally held for seniors? Are we fostering generational warfare?

What’s more, what is it doing to productivity in Europe? Can an older workforce produce as much as a younger workforce? And do seniors really want to work longer? Or are they just doing so because society is forcing them to and because their entitlements are decreasing?

All of these questions are raging now in Europe as it grapples with debt, the euro, commonality, and the region’s economy. Where the dust settles is something that all of us should pay attention to.

 (Final part of a two-part series on Europe’s economy)