Pension reforms in Europe: How do senior citizens live today?

Pension rights vary from one European country to another. Since the end of the Second World War, there have been two pension systems in Europe: the ‘Bismarckian’ and the ‘Beveridge’ systems. The first, originating in Germany, is a contribution-based system: each senior citizen receives a pension based on the contributions he or she and his or her employer made during his or her career. Pension payments are usually managed by the social partners (employees‘ unions and employers’ organisations).

The second model, originating in England, is based on the principle of redistribution: it is based on universal pensions organised by the state and financed by taxes. These systems have since hybridised. In France, for example, there are contributory pensions and state-funded minimum old-age benefits for the most vulnerable, public contributions to special pension schemes, and pensions from private savings (pension funds, life insurance, etc.).

Financing of pensions

Pensions can be financed in two ways: pay-as-you-go and funded. In a pay-as-you-go system, contributions from working people and employers finance the pensions of current senior citizens, reflecting the idea of intergenerational solidarity. In a funded system, workers save for retirement on their own, and these savings are managed by special organisations known as pension funds, which aim to grow these funds.

These two methods of funding can theoretically be found in each of the pension systems. In some European countries, the organisation of retirement is based on different schemes for different jobs. For example, in France there are several tiers of pension schemes. The first tier comprises a basic scheme funded on a mandatory payment basis, while the second tier consists of a mandatory supplementary scheme that is also funded on a pay-as-you-go basis. There are also optional supplementary schemes mandatory for certain jobs and companies, most of which are funded on a contributory basis.

Pension calculation

A pension usually depends on three key factors: length of service, basic income and retirement age. The mathematical formula used to determine the amount of pension varies from system to system, whether annuities, points or notional accounts. Annuities are used for the basic scheme in the EU 15 countries. The calculation of the pension here depends on the base salary, which can be taken into account in different ways: the last salary, the salary for the best years of a career or all salaries during a career. Also important are the contribution period, i.e. the number of years or quarters worked, and the annuity rate, which is maximised when the senior citizen fulfils the conditions for age and total confirmed period.

The points-based pension system calculates the pension based on contributions paid during a career, which are converted into points. The amount of the pension depends on the number of points accumulated, the value of each point, determined annually by the social partners in France, and the age of retirement. Such a system exists in five EU member states, including Germany and France for supplementary pensions. In the notional account system used in five EU member states, such as Italy and Sweden, working people accumulate amounts in an individual account to build up capital. At retirement, this capital is paid out according to a conversion rate based on the actual retirement age, the life expectancy of the insured person's generation and the growth rate of the accumulated capital.

In addition, there are two types of pensions: defined contribution and defined benefit. In a defined contribution system, workers know the number of contribution quarters required to receive a pension, but do not necessarily know the amount of the pension. In a defined benefit system, the worker knows the amount of guaranteed benefits. Thus, they can have a general idea of what their pension will be when they retire.

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Retirement age

Retirement age varies greatly from country to country, depending on gender, children and career path. In Sweden, Norway, Slovakia and France, the retirement age is 62. In the Netherlands and Italy, it is 67. In Spain, you must turn 67 before 2027 to claim your pension rights. The same goes for Germany, where the retirement age is set at 67, but the increase will take effect in 2031.

In Austria, the retirement age is different for men and women. Men retire at 65, while women born after 1964 will gradually move from age 60 to 65. The same is happening in Switzerland, where the retirement age for women will equal the retirement age for men at 65. In the UK, men and women can retire at 66. In Portugal, the age is 66 years and 7 months. In Belgium, the retirement age is also set at 65 but will gradually increase to 66 by 2025 and 67 by 2030. Denmark has a retirement age of 67 but is set to increase to 68 in 2030. Croatia plans to raise the age from 65 to 67.

Retirement pensions: Average replacement rate Europe

Pension benefits also vary from country to country. According to the OECD, the EU average replacement rate is 54% of gross wages. The latest annual report from the French Pensions Advisory Council (Conseil d'orientation des retraites - COR), published in September 2022, shows that in 2016-2019 pensions as a percentage of final salary accounted for between 44% and 73% of final income in all European countries monitored by COR. At the top of the scale are Italy, Spain, France and Sweden. At the very bottom are the Netherlands, Belgium and Germany. France provides a higher pension than the Dutch, Belgians and Germans. However, it is important to clarify how this pension is adjusted and whether it is subject to social security contributions.

In Germany, the average pension after 35 years of contributions is 1,520 euro gross for men and €1,106 gross for women. Pensions are not indexed for inflation, making them more sensitive to cost-of-living increases. In France, women's pensions, excluding survivors' pensions, are 39% lower than men's. They average 1,065 euro gross per month, while men's pensions average 1,739 euro gross. Including reversion, women's pensions are 1,322 euro per month, which is still 25% less than men's.

Despite the dramatic increase in women's participation in the labour market, the gap between women's and men's pensions is still very significant. In Europe, women's pensions are still significantly lower than men's. It is estimated that, on average, 22% of women aged 65 on the continent live in poverty or are at risk of poverty, compared to 16% of men. In Switzerland, the average income earned by women is also 37% lower than for men.

Pension costs: Current indicators and projections

Pension costs as a percentage of GDP also show significant differences between countries. According to Eurostat, this indicator is the sum of different categories of pension benefits, some of which (e.g. disability pensions) may be paid to people below normal retirement age. For EU countries as a whole, the rate will be 11.3% in 2020 and increase to 12.8% in 2050. France's spending is well above the European average, with the rate at 14.4% in 2020 and estimated to rise to 15.1% in 2050, while in Germany it will increase from 10.9 to 13%, in Spain from 10.6 to 14%, in the Netherlands from 7.4 to 10.4%, and in Austria from 15.1% in 2020 to 16.4% in 2050.

According to the Conseil d'orientation des retraites, the total cost of age-related expenditure (including pensions, health and dependency costs, i.e. 24% of GDP in 2019) is expected to increase by 1.9 points of GDP in the EU between now and 2070. However, not all countries will be in the same conditions: France, as well as Spain and Italy, are among the countries where spending is expected to decrease, in contrast to Germany, Belgium and the Netherlands, where spending growth will exceed 3 points of GDP.

In order to balance the number of senior citizens that need to be maintained, several countries have decided to implement reforms. For them, there are a number of solutions: increasing revenues - through contributions or taxes, reducing benefits - by reducing the size and/or number of pensions, or changing the system - by questioning the meaning and the goals set. It must be said that poverty among the elderly has fallen considerably, but there is still a fundamental ambiguity about old-age pensions: are they a deferred salary or a social benefit? This is an important question, as the answer to it will determine whether working people will support these pension schemes, as well as the legitimacy of social protection systems.