How can Europe speed up its shift to prefunded pensions?
By Google News Personal Finance ·
Population ageing, shrinking workforces and rising investment needs are exposing the weaknesses of pension systems dependent on pay-as-you-go financing. In France, Italy and several central and eastern European countries, high contribution rates, fragmented rules and repeated reform reversals undermine sustainability and adequacy.
Germany shows that even a system with contained deficits can produce rising old-age poverty when replacement rates are low.Alternative models exist that balance pension affordability with adequacy of provision. Denmark, the Netherlands and Sweden pair public pensions with large funded pillars, combining pension-system surpluses with comparatively high replacement rates, low old-age poverty and deeper capital markets.
But their funded pension assets accumulated over decades, under favourable demographic and economic conditions with strong social-partner institutions.Replicating this route would be unfeasible and too slow for most. Our forthcoming paper argues that incremental reforms will be similarly inadequate.
Parametric adjustments are politically contentious and insufficient, while gradual efforts to build funded pillars move too slowly. For instance, the German pension committee’s July 2026 proposal would channel less than 1% of GDP into funded pillars.
We instead propose a pension-system ‘kick-start’. Fiscally capable governments should issue public debt worth 25% of GDP and place the proceeds in individual retirement accounts for working-age citizens. This would create sizeable pension assets immediately and give workers a direct stake in their retirement savings.
Interest costs would rise by about 1% of GDP, but this operation would largely convert implicit future pension liabilities into explicit debt today. Higher returns on pension savings than on government bonds, additional private savings and deeper capital markets should make it fiscally beneficial over time.
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Originally published by Google News Personal Finance
