Europe Tries to Handle Political Fallout of Pension Cuts 

By Carter Dougherty, the New York Times 

August 5, 2008

Europe 

Changes in public pension rules have caused outcries in Europe, including a demonstration in May on the streets of Marseille, France. 

Social Security is known as the “third rail” of American politics, and fiddling with retirement benefits can prove politically fatal in Europe too. Yet, in recent months and years some Europeans have tried to defuse the time bomb posed by millions of retirees receiving government benefits. 

Italy gradually raised the retirement age to 59. France increased the tenure requirement for government workers to receive full pension benefits to 40 years of service. Germany curtailed annual government pension increases and raised the retirement age by two years, to 67.

But inflation and a squeeze on living standards for older workers are causing a backlash, leading some governments to reconsider — or even suspend — approved reforms. 

The fears of European workers are not unwarranted. Forty percent of Belgians over 75, for instance, will live in poverty by 2016, according to the National Pensions Office in Brussels, in part because of lower pensions. 

Such statistics are one reason that even maintaining recently enacted reforms is proving difficult. Another is Helmut Polzer. 

In a fit of rage last August, Mr. Polzer, a retired real estate developer near Munich, wrote his first letter to the editor in 50 years of reading his local newspaper, complaining about German politicians turning pensioners into “paupers.” Almost as an afterthought, he suggested a solution.

“I would be happy if the millions of pensioners — our numbers are growing — and all citizens disadvantaged by politics finally found their way into their own political party,” Mr. Polzer wrote to the newspaper, Münchner Merkur.

Weeks later, Mr. Polzer, 70, was presiding over a meeting to create the Pensioner Party, which plans to field candidates in regional elections this fall on a platform of seeking a more generous pension system.

While still a nascent operation, the Pensioner Party’s message resonates broadly with voters in Germany and across Europe. With a higher birthrate and greater immigration, the United States faces a less acute problem with government pension benefits, despite periodic flare-ups over Social Security and fears about the long-term fiscal stability of the pension systems for many state and local government workers.

In Bad Bramstedt, in northern Germany, a meeting of the local branch of the Pensioner Party. 

Most of the costs of an aging American society have to do with skyrocketing health care costs — far less of a problem in Europe. The widespread use of private pensions and employer-based savings plans in the United States also eases the pressure on taxpayers to pay retirement costs.

But in much of Europe, the need for change is more pressing.

State pension costs as a percentage of gross domestic product are edging steadily upward. In France, for example, they will reach 14.8 percent in 2050, from 13.3 percent today, according to the European Commission. That would put French pension costs on the high end of the European average. It would also be more than three times the portion of the United States economy devoted to federal retirement programs.

A measure introduced in 2003 by François Fillon, then the French employment minister, now prime minister, required public sector workers to serve 40 years before getting a full pension. But the rule was riddled with exemptions for train operators, electricity and natural gas workers, and other groups.

Most of those loopholes were closed last fall after those affected were promised higher pay to end a nine-day strike. Now Nicolas Sarkozy, the French president, wants to extend the required working time to 41 years by 2012 for the entire French work force, though without raising the formal retirement age from 60, as employers have demanded. 

Opinion polls show that a majority of French people back the 41-year rule, but are opposed to increasing the retirement age.

Germany has gone further than France, probably because it is under more intense demographic pressure.

More than 15 percent of the German population is now older than 65 — about twice the proportion in France. In addition, during a long phase of high unemployment, German politicians were under pressure to reduce employer pension contributions in order to lower the cost of creating jobs.

In 2004, Gerhard Schröder, then the chancellor, threatened to resign if parliament did not pass his pension package reducing annual increases with a formula that took into account demographic changes and tax incentives for private pension savings.

Last year, it was the current government of Angela Merkel who raised Germany’s official retirement age to 67 from 65. But with national elections coming up next year, the German parliament suspended the Schröder formula for one year. That had the effect of doubling the 2008 increase in pension payments to 1.1 percent — hardly a windfall but clear evidence of the constant pressure politicians are under, even after new laws are passed. 

“They did a very good job of putting the system on a sensible financial track,” said Monika Queisser, a pension expert at the Organization for Economic Cooperation and Development. “The problem now is the social sustainability of what Germany has adopted.”

One factor that may offset the issue could be the surprising success some countries have had with the introduction of private pensions. 

Sweden created a system in 1999 that siphoned off 2.5 percent of a worker’s gross income and invested it in privately managed stock and bond funds. Employees choose the funds themselves, based on their appetite for risk. 

Since then, countries including Bulgaria, Romania, Poland and all the Baltic states, as well as Germany, have adopted similar programs. (A proposal by President Bush to do much the same died at the beginning of his second term.) 

Germany’s system, using tax incentives to persuade people to save for their own retirement, got off to a slow start in 2001. But now some 11 million Germans have bought into it.

Mr. Polzer, the founder of Germany’s pensioners’ party, is even campaigning in favor of extending it. Thomas Langer, a professor of business at the University of Münster who studies pensions, said, “I have no doubt that in the last five years there has been a serious change in mentality in Europe.” He added, “it would have been nice if we had tackled it earlier though.”

The question is whether broader changes can be put in place — and made to stick — before the demographic time bomb explodes. 

Vincenzo Galasso is a professor at Bocconi University in Milan and co-author of “Contro i Giovani” (Against the Young), a popular book with a cover illustration that shows a Cronos-like monster devouring young people. 

Italians are not eating their young, but they are, in Mr. Galasso’s view, fleecing them. After agreeing to raise the retirement age to 60 by 2009, Italy put off the reform until 2017.

The median age of Italian voters is around 46 years now, but will reach the late 50s by midcentury, Mr. Galasso points out. Unless the retirement age rises further — and soon — more Italians will have a vested interested in opposing change.

“We’re on a continuum where reform becomes harder and harder,” Mr. Galasso said. “I hope that there is no point of no return.”

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