An analysis of pension reforms within the European Union

Abstract

Lower birth rates and a higher life expectancy are presenting a major challenge to EU member states as they are leading to an ageing population. Unless working age people plan and save for their retirement and stay longer in employment, pension sustainability and adequacy cannot be guaranteed. PAYG pension systems will be the most affected given the aforementioned demographic situation, as this would lead to falling employment rates, with less people paying NI contributions. Pensions are the main source of income for older people and the main aim of pensions is to “deliver adequate retirement incomes and to allow older people to enjoy decent living standards and economic interdependence” (European Commission, 2012).The key elements of successful pension reforms must ensure that this basic principle is met and that adequacy and sustainability are maintained both now and in the future. This dissertation analyses the reforms implemented in five EU countries: Denmark, Netherlands, Sweden, the United Kingdom and Malta, and it also examines the effects and implications of these reforms on the working population. The hypothesis of this research revolves around the idea the EU cannot have a standardised pension system due to economic, social and cultural differences. The reforms implemented involve some or all of the following features: 1. An increase in pensionable age 2. Indexation to life expectancy 3. Increase in contributory periods and rates 4. Hindering access to early retirement and penalties 5. Possibility of late retirement 6. Increasing older workers’ employability 7. The use of second and third pillar pensions The effect of the above is to lengthen working lives as much as possible and to try and strike a balance between the time spent working and in retirement. By lengthening working lives, both the old age dependency ratio and the support ratio can be recovered, making pension systems more sustainable. Lastly, through the use of second and third pillar pensions people are being made more aware of the current pension situation, allowing them to have a more active role in planning for their retirement.