Europe Rethinks Its Pensions
By: John Tagliabue
The New York Times,
December 26, 2000
PARIS, Dec. 25 — Like most people in France, Jean-Pierre Thomas does not come from a long line of stock owners. "If my grandmother had owned stock," he said, "I'd be rich today."
Still, in 1996, as a member of parliament, Mr. Thomas, now a 43-year-old investment banker, pushed through legislation to establish tax-subsidized personal pension funds in hopes of turning France into a nation of shareholders. At the time, fewer than 2 in 10 French adults owned stock, less than half the level in the United States. While Mr. Thomas's bill was passed, however, labor unions and the Socialist Party resisted what they saw as a weakening of state pensions, and the private retirement funds were never introduced.
Such ambivalence toward private pensions is not unique to France. A similar reluctance to adopt private pensions has long been evident in much of Western Europe.
But shifting demographics — chiefly falling birth rates and increased longevity — are squeezing government- run pension systems that tax workers to pay their elders. As the number of workers shrinks and the pool of pensioners grows, such plans are coming under strain.
Acknowledging the quandary, several governments have begun experimenting with alternatives, though there is still no agreement within Western Europe on how or even whether to supplement state-run programs with tax-deductible private retirement plans. Sweden recently allowed its citizens to invest part of their government pension payments themselves, in mutual funds or other savings plans. Germany's Socialist government has recently proposed a similar idea.
Paradoxically, these innovations from Europe's most left-wing governments more closely resemble the Social Security campaign proposal of George W. Bush, the Republican candidate, than that of Vice President Al Gore.
In France, far tamer alternatives have been put forth, and in any event action has been postponed until after national elections next year.
A growing number of individuals are not waiting for government to make up its mind. Encouraged by bankers — including Mr. Thomas, who now works at Lazard Frères — they are investing on their own, pushing up the amount of mutual fund assets under management in Europe to the equivalent of $3.5 trillion this year. That was less than half the $7.2 trillion in the United States, but more than double the $1.7 trillion in Europe five years ago.
"People are reacting to shortfalls in the retirement system," said Michael Saunders, head of European economics at Schroder Salomon Smith Barney in London.
The effects are striking: increased equity investment, coinciding with the adoption of the euro as a single currency, has spawned a huge new capital market that has lowered financing costs and enabled governments gradually to lower taxes. At the same time, it has given private businesses a cheaper alternative to bank financing.
To take advantage, European corporations have had to sharpen their performance and introduce more responsive corporate governance, helping make Europe more competitive with the United States and Asia. "From the point of view of the economy, this is a very positive long-term development," Mr. Saunders said.
To accelerate change, the European Commission recently proposed guidelines for a single European market in pension funds, to make it easier for funds to invest beyond national borders and shift from government bonds and other fixed-income securities to stocks. Moreover, it aims to unify national tax laws and make it easier for retail investors to move their money across borders.
Ultimately, the question of whether to introduce private pension funds will depend on national governments. The commission forecasts that pension fund assets in Europe will grow in the next five years to about 3 trillion euros, or $2.5 trillion, from 2 trillion euros today. But over half of that is managed in just two countries, Britain and the Netherlands.
In recent months, the German government of Chancellor Gerhard Schröder announced sweeping plans to reduce retirement benefits, while at the same time allowing Germans to channel a portion of their retirement tax payments into private pension plans. The changes, if they come, will be revolutionary for Germany, where comprehensive government pension programs were invented in the 19th century.
Still, obstacles remain. The government has not been able to agree on tax credits to sweeten investment in private pension plans, and a lobbying battle is raging among banks, brokerage firms and life insurance companies over the relative tax relief each hopes to achieve for its type of investment product.
Moreover, the government has made frequent changes to its proposals and recently announced that the changes, if approved, would not come until the start of 2002, one year later than anticipated. Thomas Weisgerber, a retirement expert at the Association of German Banks in Berlin, said frequent changes in the proposed bill made critical discussion of its proposals akin to "target shooting at a carnival."
In Sweden, long known for cradle- to-grave security, the change has been even more sweeping. Retirement benefits are no longer fixed, but vary according to average life expectancy. Under the most dramatic change, Swedes will begin in January to funnel part of their social security payments into mutual funds. Swedes will have roughly 500 funds to choose from, offered by domestic and international asset managers.
Hence, the trend toward stock investment is expected to continue. In Sweden, the changes could produce a gradual shift of up to $16 billion from bonds to stocks; in Germany, the banking association expects private pension funds to take in as much as $28 billion annually by 2008.
Italy scaled back pension benefits in the early 1990's and introduced private pension funds, and recently announced tax credits to make investment more palatable. But Tito Boeri, a pensions expert at the Bocconi University business school in Milan, said that, curiously, Italians, after paying high social security taxes to support the pensions of their parents' generation, have little set aside for their own retirements. Moreover, pension funds are often too restrictive in their asset management.
"Their portfolios are mainly bonds, and that's too conservative for young people," he said.
In contrast to the United States, where the Social Security system continues to record surpluses, the retirement funds in several European countries already operate with losses that have to be made up from the general government budget, putting upward pressure on taxes. Italy, for instance, has an unfunded old-age pension obligation amounting to an estimated 1.5 percent of gross domestic product, or about $18 billion annually, so that in recent years it had to devote some 3 percent of the general budget to cover the gap.
Complicating the debate is the way that retirement plans influence the competitiveness of individual European countries, because of the effect pensions have on raising or lowering the level of payroll taxes companies pay. Moreover, many European politicians and business leaders argue for the creation of private pension funds as a counterweight to American and British funds, which have poured billions of dollars into Europe, as European industry has reorganized to increase its competitiveness.
"At the moment, our companies are paying dividends to American funds," Mr. Thomas of Lazard said, "benefiting retirees in Texas."
Of course, as in the United States, the debate over retirement in Europe has spawned ideological sniping and nowhere is the clash more evident than in France.
On one side stands the Socialist-led government and the labor unions, who agree to the need for an overhaul of retirement savings but fear that introducing government support for private pensions will favor mainly the wealthy. Opposing them are French business leaders and a growing number of citizens who have been forged by the new culture of share ownership; they both believe that only by giving individuals greater responsibility for their retirement can pressure be taken off the foundering government pension system.
In recent months, the government has proposed changes, including the creation of a reserve fund, a plan to equalize benefits in government and private employment, and a proposal for 10-year saving plans with tax credits for small and midsize companies. (France does have private pension funds, but they are only accessible to government civil servants. There are also short-term tax-deferred savings funds, but experts do not consider them adequate for retirement savings.)
The Communist labor union C.G.T. called the saving plans "close to pension funds" and hence menacing a fair distribution of benefits. At the more moderate C.F.D.T. labor union, Jean-Marie Toulisse, the chief pensions negotiator, approved of the savings plans as long as they resulted from union-employer negotiations and all workers had equal access. But he criticized the government for postponing most pension decisions until after the coming general elections. "The longer we wait to make decisions," he said, "the more brutal the decisions will have to be."
French business pushes ahead, meanwhile, offering employees stakes in their future through share ownership.
Take Alcatel, the French global electrical manufacturing giant. This year the company introduced a stock-purchase plan for its employees, and 59,000, roughly half the total, signed up — including 60 percent of Alcatel's French employees. Pierre Le Roux, the executive who created the plan, said it was "completely independent of the pensions issue" and intended to motivate workers.
Jean-Pascal Beaufret, the head of Alcatel's pension program, said many employees saw share ownership as a supplement to their government pension. "That's one of the reasons why employees are much more interested in stock holdings," he said.
The embrace of shareholder culture is one sign that French workers may be more accustomed to risk than the elite assumes. Another is the willingness of Alcatel engineers to work abroad. After a series of acquisitions in the United States, the company began a "Go U.S.A." program to recruit 250 French engineers willing to relocate. More than 1,000 French employees applied.
Mr. Beaufret, who left a job as a pensions expert at the Finance Ministry 11 months ago to join Alcatel, said that in the end France would be forced to enact "a mix of solutions" giving individuals more responsibility for their retirements.
By contrast, for Hans Eklund, responsible for pensions at Ericsson, the Swedish electrical giant, such debates seem remote. Like all Swedes, Ericsson employees pay 18.5 percent of their salaries in retirement taxes, but beginning Jan. 1, 2.5 percentage points of that amount will be funneled into personal investment accounts whose asset managers Swedes will be able to choose personally from a list of 500.
"Some would describe it as a giant step," Mr. Eklund said. "I would say a positive, good step."
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