Poverty in old age will be the norm for a large chunk of Europe’s population unless current retirement policies undergo deep reform, the EU’s workplace pensions regulator has warned.
“One in five Europeans is already at risk of living in poverty at old age,” said Petra Hielkema, chief of the Frankfurt-based European Insurance and Occupational Pensions Authority.
“[That’s] a ridiculously high percentage, frankly. And if you then look at women, they have a 30 percent larger risk for that,” she told POLITICO in an interview.
And it’s getting worse: Europe’s population is aging rapidly, and within 40 years there will be only 1.5 workers for every pensioner. That’s half the current ratio.
“Some countries are already there. And that’s unsustainable,” Hielkema said. “Europe has a pension problem and countries that do not have strong supplementary pension systems are really at risk.”
For decades, the standard European model has been to rely on a government state pension system to look after citizens in old age. But as people live longer and birth rates fall, the cost of funding these systems is soaring. Add to that the other costs of an aging population, such as health and aged care, and the taxpayer bill becomes eyewatering.
One answer is to create complementary private or workplace pension systems to ensure people have a personal pot of pension savings they can draw on in retirement.
Scandinavian countries are the best equipped to face the incoming crisis because they have a range of different sources for pensioners: a pay-as-you-go pension system, occupational pension funds — which means that when you work, you also save for your retirement — and further investments in pension products.
But many countries, especially in Eastern and Southern Europe, rely mainly on state pensions and have smaller pension checks compared to salaries.
In many cases, citizens aren’t really aware of their situations because public authorities and employers don’t provide them with a full overview of their pension entitlements. Brussels can do little more than make suggestions because the competence is at the national level.
Still, Hielkema, a Dutch national who has run the occupational pension authority since 2021, is convinced there is “momentum” for a huge change, which will give EIOPA a bigger role.
“One, we see the problem is getting bigger, and so do individual governments. And two, let’s be honest, why [are] pensions on the agenda? Because we need more investments, and one way to generate more investments is to move savings from bank accounts into investment products,” she said.
We have a plan
In the next few months the European Commission will issue recommendations on savings accounts and pensions to address the EU’s demographic and financial challenges.
By the end of the year it will propose that governments set up digital accounts for the savings and investments available for each citizen, systems to track pensions, dashboards to communicate pension benefits, and tax incentives to make retirement saving more attractive. It will also review EU rules for workplace pension funds and pension investment products.
The key measure in the package is a system to automatically enroll people in occupational pension funds, similar to what is already in place in the United Kingdom, Poland and Italy.
“Automatically, you will be included in the pension funds if you work. If you don’t want that, you have to consciously opt out.” Currently, she said, people could opt into a workplace pension, but inertia means few do.
“The assumption is that the inertia will also work the other way around,” EIOPA’s chief said, meaning few people would opt out. Where it is in place, the mechanism works and leads to more people saving through their jobs for their retirement, she said.
The idea is to have “something that is also available for people who are self-employed or who are gig workers, to ensure that also they can save for later,” she added.
Ultimately national governments must launch such reforms, and the topic of pensions is politically explosive.
François Bayrou’s French government lost the support of the Socialists when workers and employers failed to find an agreement on pension reforms. This summer, Germany’s Chancellor Friedrich Merz suggested that young people save for their retirement, triggering a backlash from trade unions in defense of the state pension system.
How much is at stake? In Germany workplace pensions amount to €267 billion, whereas in Sweden — a country with one-eighth the population of Germany but where almost everyone has a pension fund — workplace pension savings amount to €516 billion, or 92 percent of GDP.
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