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Victory in Europe brings its own costs

Victory in Europe brings its own costs

While the eyes of the world focused on the market reaction to the stalemate in the UK election and the ongoing travails of the euro, the tanks rolling through Red Square in Moscow on Sunday to celebrate 65 years since VE day were a reminder that there are bigger issues rumbling out there that are being studiously ignored.

The triumph of the allies in the war was to result in the return home of millions of soldiers, after years away fighting, with a consequent jump in the number of pregnancies across Europe which was sustained for the next two decades. This wave of new additions to the population is now about to start reaching 65 and to begin to retire. So Europe must brace itself for a significant rise in the pensioner population beginning next year, in tandem with the reduction of the active labour force to support them.

If state pension plans were properly funded, this would all be of no consequence. However, the majority of countries are funding pension payments through the tax system on a pay as you go basis. The consequence of this will be that there will be a sustained reduction in the ratio of workers to pensioners over the next two decades.

Private pension provision is currently hopelessly inadequate to cover the gap. States will be forced to spend increasing amounts of their budget on supporting an educated and increasingly politically active pensioner population, who are strident in their demands. It is hard to have any sympathy for the governments, given that this problem was foreseeable and indeed foreseen and discussed widely over the last two decades. But nothing was done in the good times; the boom of the last decade and a half is over and western societies are about to become burdened with pensioners at the same time as they are burdened with excessive debt from the banking crisis and subsequent recession.

Even the current starting point is poor with ratios for the UK currently 4.1 workers per pensioner compared to 5.2 in China, 8.4 in Latin America and 10.3 in India. And the baby-boom phenomenon is exacerbated by two other factors; the ongoing decline in birth-rate in the western world and the increase in longevity. So we will have less and less entering the workforce with more pensioners lasting longer in retirement.

Immigration could be one answer but it has problems. A recent UN report "Replacement migration" asserts that to maintain its current ratio of retirees to workers, Germany would need to take in 3.6 million immigrants annually from 2000 to 2050 and the EU as a whole would require c.13.5 million immigrants annually across the same period.

Alternatively Europe could reduce the pensioner pool by postponing retirement and most countries are trying to do so, although the same UN report states that to support current ratios means increasing the retirement age to 75 years of age across the board. Finally, increasing private pension provision is part of the solution, but is a more medium term one which can’t solve the problem over the next decade.

But maybe there is one other avenue that is not being explored. Increasing the productivity levels of those in the workplace would mean that they would be better able to sustain a larger retired population. Increasing employment levels and changing restrictive legislation would allow increased productivity per worker to support a higher number of dependents.

For example, the restriction on working hours in the Social Charter means that Europeans are guaranteed a shorter working week, but because of the ageing population, will now have to work for years longer. Maybe it’s time that the citizens of the EU were asked whether they want to work shorter hours into their 70s or work for longer hours but retire earlier. I know which I’d choose.

Tom Murray

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