The European Union's Ambassador to the US, John Bruton, has called for economic incentives to be considered to boost Europe's birth rates to rejuvenate the workforce and diffuse the pensions timebomb.

Addressing the Irish Financial Services Association annual dinner in Dublin yesterday, Mr Bruton said the present low birth rate is, in part, a result of the design of the welfare state and if that design is changed, so might the birth rate. "Economic incentives play a major part in human behaviour and we should not be so idealistic or politically correct as to ignore the effect of some of the incentives presently built into the European Social Model are having in artificially depressing European birth rates" he said.

Pension financing problems on both sides of the Atlantic could lead to a painful clash between a diminishing number of younger people at work, who are forced to pay higher taxes and insurance contributions, and an increasing number of retired people demanding their rights, he said.

"As the average age of the workforce rises, willingness to innovate, to move house, or to take risks will diminish too. All of this will slow economic growth, but worse still, it is liable to be exploited by populist politicians who will put forward solutions that will make the problem worse," he warned.

Mr Bruton said the present design of the welfare state in most European countries is one that gives much larger taxpayer support to the financial and other needs of dependent retired adults than it does to dependant children and young adults.

"Today's children and young adults may not have votes yet, but they are tomorrow's taxpayers and tomorrow's pension contributors and there is little equity as between present tax, welfare and pension treatment of households containing children and young adults and the treatment of households without them" he said.

This problem is being recognised in France where there are proposals to alleviate the pension contributions.