The European Pension Problem and what the U.S. should Learn from It

[This post was written for Sound Economics by Geremia Lizier-Zmudzinski]

The 20th century saw a rise in global prosperity as medical and economic advancements contributed to vast improvements in the life of the average person. However, they haven’t come without unintended consequences – one of which is now very obvious in Europe.

Thanks to rapid progress in medicine and health care, life expectancy across European countries has risen from 69 to 80 since the 1960’s. Meanwhile, as industrialization, global trade, and technological improvements, to name just a few factors, have improved the quality of everyday life, people are less inclined to have multiple children and the birthrate has dropped by 40% since the same time.*

This of course means that for the foreseeable future, Europe will continue to have more and more elderly folk and fewer and fewer young people. And as the ratio changes between the elderly and the young, so too should expectations. But what is clear in Europe, at least as of today, is they have yet to change.

The primary expectation I am referring to is retirement age, which in most European countries is 65, and the pension that comes with it. What is abundantly clear is that European governments, with the exception of the U.K, Netherlands, and Norway which have healthy levels of savings in public funds or employer pension plans, are quickly running out of money with which to pay retirees.

What this means is that governments are paying for these pensions with yearly tax revenue: tax revenue that should be used for other government programs like education, health care, or infrastructural improvements. This, in turn, has the consequence of increasing government debt – already a large problem due in part to the financial crisis of 2008 – which according to Roy Stockell head of asset management at Ernst and Young, means “Western [European] governments are close to bankruptcy.”

Unless the recent influx of migrants increases the amount of workers working to support the program, there are only two tenable solutions to this problem 1) A decrease in what are already very low pension payments and 2) Raising the retirement age and delaying pensions.

Though plausible, I would argue the first option is not ethical. Many poor Europeans depend on their pensions just to survive and many of them still work, doing what they can to earn enough to make ends meet. I prefer the second option because as life expectancy increases I think it is reasonable to raise the retirement age. This may sound harsh or unfair but part of the beauty of improved health care is that 65 is much younger than it used to be, and therefore, as crazy as it may sound, working into one’s 70’s should be considered a sensible possibility, if not even an expectation.

The sad truth is that in Europe the situation is already at a critical point and many European governments will have to make huge concessions and/or sacrifices lest many of their elderly are slowly deprived of necessary retirement payments. Stateside, however, the situation is not quite as dire. Simply put, at its current rate the United States is about 20 years away from Europe’s condition..

Like Europe, the U.S. has a growing retiree to working age population ratio and its funds for Social Security and other transfer payments are quickly drying out. Though there may be other solutions, I believe the most simple and effective one is the aforementioned raising of the retirement age. It is no secret that there are many baby boomers reaching retirement age and expecting their promised retirement payments.

It is also no secret, although maybe a more subtle one, that boomers have reaped the benefits of massive and widespread American prosperity during the second half of the 20th century. They are the first generation for which home ownership became an expectation, households owned multiple cars, and where vacations became an annual event. They are the Kennedy and Reagan (RIP Nancy), big box store, surplus of groceries, rise of television generation. In short, they are the first generation in the world to know what it means to live lavishly and the first generation to expect a truly comfortable life.

With this expectation for comfort should come the realization that if current and future generations are to enjoy the same prosperity one vital concession must be made: provided good health, people currently older than 50 should work until they are 70, at minimum. This is not so much a political issue as much as a matter of basic economic common sense – the longer people are expected to live, the longer they should be expected to work.

Though retirement age is certainly not the only factor contributing to the Social Security problem, it is much easier to require people to work longer than to get people to save more for retirement (a separate issue for another post). Raising the retirement age is a touchy subject among politicians who fear repercussion from senior voters, but for the reasons I have mentioned it should not be. Lest the United States wants to find itself in a similar situation to Europe’s, the entire retirement paradigm needs re-evaluation.

*Social factors largely contribute to this phenomenon as well. To name a few, more woman work and there is less of an expectation for them to raise children, people marry and have children later in life, and an increasing amount of people simply prefer to have fewer children.

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