What is the State of Pensions Reform in Europe?

Session 4: Pensions (Part II)

Session 4: Pensions (Part II)

The second part of the Second Plus Europe Conference’s fourth session, which was entitled What is the state of pensions’ reform in Europe? closed the discussion on pensions at the European level. The moderator of this session, Professor Stephen Hagen, introduced the speaker, Professor Javier Díaz-Giménez who specialises in macroeconomics. Professor Díaz-Giménez provided us with a macroeconomic perspective on the state of reforms and modernisation regarding pensions in Europe by expounding the main respective principles and ideas.

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Firstly, Professor Díaz-Giménez referred to the three stages of a person’s life, namely childhood, working life, retirement. He suggested that the advanced societies suffer from time inconsistency as far as saving from an early age is concerned, thus reminding us of the story of ants and crickets. Consequently, the public sector puts pressure on these societies in order for them to save for their retirement from as early as possible. As a result, mandatory pensions constitute forced savings for the retirement. Secondly, Professor Díaz-Giménez put four crucial questions for all kinds of pension schemes and explained that transparency is the vital element in designing a pension system.

[su_pullquote align=”right”]Javier Díaz-Giménez explained that transparency is the vital element in designing a pension system.[/su_pullquote]The first question concerned the quantity of savings which is necessary, while the second regarded the rate of return. Professor Díaz-Giménez emphasised that it is crucial to start saving from an early age so as to maximise the returns. He continued with the presentation of the optimal savings for retirement through a series of equations. Finally, he concluded that 23,1% of savings on the wage is a logical percentage. The third question was about the type of insurance and the fourth focused on the degree of solidarity of a pension system.

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According to the Professor, there are two basic pension systems, the Pay-As-You-Go system and the funded system. In the former, a specific percentage of the labour income is saved and invested on assets, whereas in the latter the emphasis is given on the intergenerational promise of solidarity.

[su_pullquote align=”left”]The constantly increase in age of European populations, the significant decrease of births and the rise of unemployment rates are the main problems that pension systems face today[/su_pullquote]Thirdly, the Professor accentuated the fact that European citizens work for less years, while at the same time they live longer than in the past. Notwithstanding that this fact is, of course, a blessing for the workers and future retirees; it challenges the sustainability of pension systems. The constantly increase in age of European populations, the significant decrease of births and the rise of unemployment rates are the main problems that pension systems face today. Given the respective European rates, three solutions are proposed from the mathematical point of view.

Solutions to the pensions problems

The first is to reduce by fifty per cent pensions, the second is to double savings for retirement and the third is to prolong the average retirement age at the age of 72,4 years. However, Professor Díaz-Giménez acknowledged the harsh character of the aforementioned solutions from the social point of view. Therefore, he suggested that multi-pillar schemes are the most effective solution to the European pension systems’ problems.

[su_pullquote align=”right”]EU pensions should be reformed now, according to Javier Díaz-Giménez[/su_pullquote]The first pillar of these schemes consists of the Pay-As-You-Go system with the parallel implementation of the National Defined Contribution system, according to the Swedish model. This combination guarantees indefinite sustainability of the pension system and safeguards pension rights. The second pillar is composed by mandatory occupational schemes with a low management cost. This pillar will complement the first pillar and will be preferably managed by the European Pension Agency. Finally, the closing message of the Professor was that EU pensions should be reformed now.

The speech of Professor Díaz-Giménez followed a question regarding the amount of savings that is realistic especially in the countries of the Southern Europe during the financial crisis. Professor Díaz-Giménez underlined that it is of utmost importance for a person’s future with life expectancy at 85 years to save, regardless of the amount of money.

The moderator of the session, Professor Stephen Hagen, commented that, at least, life expectancy at 85 years is a positive message. Nonetheless, he suggested that it should be concomitant with the realisation of a healthy, wealthy and wise status.

[su_heading]Rapporteur: Stavroula Tsitaki (Aristotle University of Thessaloniki). Edited by the Plus Europe Association.[/su_heading]