Europe's Crisis Has Yet to Come of Age describes the enormous problem confronting European nations:
"Europe's troubles look daunting enough already, but another crisis looms.
Most European Union countries owe more than twice their annual gross
domestic product in pensions promised to current workers and retirees.
As governments scale back benefits, companies and individuals face a
rising burden. But saving for old age could prove a crushing blow to
There are three types of European pension shortfalls. First, from
governments, the EU's main pension providers: Sweden, Denmark and Poland
set aside money to part-fund state pension liabilities, but in most
countries they are financed by tax contributions. Pension deficits are
typically left out of public debt figures, but the average EU country
would need to set aside 8.3% of GDP a year to fund current pension
policies, the National Center for Policy Analysis estimated in 2009.
Deteriorating growth and lower interest rates since then will likely
have swelled that figure.
Aging populations are a further strain. In 2010, the average EU
pensioner was supported by almost four workers; by 2050 it will be two.
The current average retirement age is 61, but may need to be as high as
75 to make state pensions sustainable, estimates JLT Pension Capital
Strategies. The boldest proposal, in the U.K., is 68 by 2046.
Switzerland and Greece have now cut pension deficits, the latter
reducing monthly payments by up to 40%.
Company deficits, the second type of shortfall, also have grown. The
Netherlands and the U.K. have large defined-benefit pension plans that
are part-financed by employers. Here, investment performance has
disappointed: Real annual returns for pension funds in most Organization
for Economic Cooperation and Development countries were negative from
2008 through 2010. In the U.K., pension plans are sitting on an
estimated £217 billion ($334 billion) shortfall. Corporate sponsors will
need to pour in 13% of their cash holdings to plug the gap in coming
years, a recent survey of trustees estimated.
Individuals are the third source of concern. In France, Cyprus and
Luxembourg, private pension provision is low, but as governments
struggle with rising debt, more countries are shifting the pension
burden onto workers, encouraging them to pay into defined-contribution
plans in which returns depend on investment performance. Countries like
the U.K. also are continuing to shift from defined-benefit to
defined-contribution plans. Yet today's low-yield environment offers
little incentive to save. Household savings rates have fallen to 11.4%,
from 13.4% in 2009, Eurostat data show.
Today's workers would need to set aside an extra €3,100 ($3,860) a
year to adequately fund their retirement in Italy and €12,000 in the
U.K., estimates insurer Aviva. That's on top of their state pension,
assumes a 5% return on investments, and an income equivalent to 70% of
their preretirement earnings. Some of the biggest needs for individual
savings are in recession-hit countries like Ireland and Spain, where
boosting savings rates would be a further hit to growth.
That's a problem to tax even Europe's wisest old heads."
Sound familiar, my fellow Americans?