Sustainability and adequacy of pensions in EU countries. A cross ...

This paper is organised in five sections. Section 1 sets the context by highlighting sustainability
challenges arising from population ageing, and the financial, fiscal, and economic crises.
Section 2 analyses the aggregate impact of pension reforms, using the indicator ‘Benefit Ratio’,
as calculated by the Working Group on Ageing of the EU’s Economic Policy Committee. Section
3 extends the discussion on pension income adequacy by examining how pension reforms
have reshaped the structure of pension systems across EU countries. These impact-of-pensionreforms
results are derived from the simulations of pension income entitlements for future
retirees, undertaken by OECD in 2009. The next section (Section 4) presents micro evidence
on changes in the entitlement of public pension income during the period 2006-2046. The
indicator in use is the net ‘Theoretical Replacement Rate’, as provided by the Indicators Sub-
Group of the EU’s Social Protection Committee. Like OECD calculations, it is calculated for
stylised workers, approximating impact of pension reforms for the income entitlement of
future retirees. Section 5’s concluding summary discusses policy challenges that EU countries
face going forward, with a dual focus on pension policy impacts as well as the fiscal and labour
market policy.
1. Setting the context: the sustainability concerns
a. The population ageing challenges
An essential starting point is to assess the varying extent of population ageing faced by EU
countries. The EU of today had already, by 1950, the highest old-age dependency ratio in the
world, and during the period 2000 to 2050 the largest increases are projected to take place in
Japan (by close to 50%-points), China and the EU27 (by almost 30%-points). 1
Figure 1 shows this ratio of over 65s to working age (15-64) population in the EU 27 countries,
with the trend between 2008 (actual, blue) and 2060 (projected, green). The average ratio
predicted for the EU27 is 54% in 2060, and this is a staggering increase from 25% in 2008. This
implies that, on average, the EU would move from having four working-age people for every
person aged 65+ to a ratio of two to one. This steep rise in the old-age demographic
dependency ratio will exert not just significant additional demands on future public finances in
the form of rising expenditures on pensions, health and long-term care but also they will have
an adverse impact on growth potential at national levels.
Note also the list of countries (boxed) on the left-hand side of the graph – a bloc of countries
from the former communist states of Central and Eastern Europe (CEE). The unique
conjunction of rising longevity and low fertility as well as emigration makes population ageing
a truly challenging phenomenon in CEE countries. This situation will greatly impact on their
ability to address the challenges of pension income adequacy and sustainability in the future,
and they will require support from the rest of the EU in meeting these challenges.
1 These conclusions are drawn from the estimates based on the UN World Population Prospects: The
2008 Revision, as referred to in European Commission (2009a), p. 48.
3