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Only 15 years of surplus will save Euro pensions

By Heather Tomlinson, the Independent

21 September 2003

European governments need to maintain a budget surplus for more than 15 years to fund state pensions for today's middle-aged, the International Monetary Fund has warned.

Europe's ageing populations will need public spending of around 17 per cent of GDP by 2050 to fund their pensions. Governments must run surpluses of about 2 per cent of GDP for the next 15-20 years to meet the requirements, the IMF said last week.

It offered the alternatives of making "substantial" cuts in state pensions or replacing them with private sector schemes. However, the latter could also blow a hole in government finances, the IMF said in its report "Euro area policies: selected issues".

Last week the IMF, whose annual meeting opens in Dubai this weekend, criticised France and Germany for failing to reform their public finances. The countries are this year expected to breach the eurozone limit of 3 per cent of GDP on budget deficits.

The countries of continental Europe face the worst pension crisis. The IMF said the problem was not as acute in the UK because it has a smaller state pension system.

But Roger Bootle, managing director of the research firm Capital Economics, said the UK's company pension schemes faced similar deficits. "We have got this fantasy that we are alright because our [public] systems are funded, and Europe is up the creek," he said. " But the problems that affect them are the same as those affecting us. For them it manifests in [budget] deficits, over here in the form of underfunded [company] pension schemes."