EUROPEAN DIARY:Far-sighted political leadership is required now, with the results not being seen for generations, writes ARTHUR BEESLEY
GEORGE PAPANDREOU hasn’t had much to celebrate recently but the Greek prime minister achieved something of a coup last week when his administration steered radical pension reforms through parliament in Athens.
The reforms come as very bad news for older Greeks: they will work longer and receive reduced retirement benefits. But the changes constitute an important building block in the effort to bring the Greek economy back to the point where it can stand on its own feet again.
The €110 billion EU/IMF rescue plan for the country assumes it will remain shut out of financial markets for 18 months. Two months in, with street protests and strikes continuing, Papandreou has recast an unfeasibly generous pension system which allowed many Greek workers to take retirement before the age of 50.
The reforms unify the retirement age at 65, reducing benefits further by calculating them on lifetime income as distinct from final salary. To say such shock treatment is highly sensitive politically is to risk gross understatement. Yet the reforms, however unpleasant they prove to be for people caught in their maw, show just how deep the fiscal rot ran in Greece.
While pressure on his country’s pension system proved particularly acute, Papandreou is not the only European leader to be confronted with similar tensions and their political consequences. Given rising life expectancy and lower fertility, many would argue that action now is the only way to offset the emergence of untenable strain on the public finances.
German chancellor Angela Merkel wants Germans to retire at 67 from 2029, something that drew withering comparisons with the old-Greek regime when she was trying to drum up support for her administration’s participation in the Athens’ bailout.
In France, proposals from President Nicolas Sarkozy to raise the retirement age to 62 from 60 was prime on his agenda until l’affaire Bettencourt blew up in his face last week. With a similar increase on the cards in Spain, Britain plans to raise the retirement age to 68. In Ireland, meanwhile, the Government says the State pension will not be paid until the age of 67 from 2021 and 68 from 2028.
At the best of times your correspondent would rather not think about his old age (still decades away), but the question is everywhere these days.
Talk to a high-level official in the European Commission about where the EU will be in 20 years’ time and it’s not the great geopolitical challenges that are first raised, but the ageing of the continent. “There’ll be a lot more grey hair around.” With Europe’s working age population forecast to start shrinking in 2012, current projections point to a massive increase in the old-age dependency ratio in the coming years.
At present, there are four people of working age for every person over 65. By 2060, there will be but two people of working age for every person above that age. The unavoidable consequence of that is that people will retire later, although demographic trends present a myriad of other problems in the pension system that would not be solved by working longer.
In an effort to stimulate debate on a topic that necessarily demands long-term thinking, the commission published a discussion document last week which points to a massive challenge for policy-makers throughout the union and changed horizons for the hundreds of millions of people they serve.
Although the Green Paper makes a point of saying the EU executive does not question the prerogatives of member states in this arena, it says a critical point is being reached in Europe’s “ageing challenge” and adds that it has been seriously aggravated by the financial crisis.
“Setbacks in economic growth, public budgets, financial stability and employment have made it more urgent to adjust retirement practices and the way people build up entitlements to pensions,” the paper says.
“Unless people, as they live longer, also stay longer in employment, either pension adequacy is likely to suffer or an unsustainable rise in pension expenditure may occur. The impact of the demographic challenge, as aggravated by the crisis, will tend to reduce economic growth and put pressure on public finances.
“While reforms have already significantly reduced the impact of ageing on future pension costs, age-related public expenditure is still set to increase overall by almost 5 percentage points of gross domestic product by 2060, half of which is due to spending on pensions.”
With governments across the board struggling under the weight of excessive debt and lax public finances, none of this makes for pain-free solutions. At the most basic level, however, it seems that the earlier action is taken the greater the prospect of offsetting serious problems down the line.
This calls for far-sighted political leadership, the results of which might not be seen for generations. That is never easy, although some governments have started to face up to the problem.