EFRP paper: Towards more funded pensions
23 March 2011
EFRP calls upon the Spring European Council to maintain the holistic approach to pensions, as economic, pension and social policy are all intertwined and cannot be considered in isolation.
The Heads of State or Government of the euro area agreed on the Pact for the Euro on 11 March 2011. The pact sets out policy commitments to foster competiveness, raise employment, enhance the sustainability of public finances and reinforce financial stability. It is intended to supplement existing initiatives such as the Europe 2020 strategy and the economic governance package.
EFRP very much welcomes the Pact’s commitment to pay the highest attention to the sustainability of pensions, health care and social benefits, for two reasons:
1. The Stability and Growth Pact takes a very short-term view of public finances. Its corrective arm focuses entirely on the current deficit and debt. The medium term budgetary objective in the preventive arm is insufficiently related to sustainable finances. The lack of long-term orientation has encouraged Member States to postpone – or even reverse – the development of funded pension systems.
2. A greater emphasis on sustainable public finances is much needed to prevent excessive debt levels in the future. This would constitute a serious threat to price stability. High inflation provides heavily indebted governments with a very tempting exit strategy. However, high inflation imposes great costs on (future) pensioners by eroding the purchasing power of their retirement savings.
Although the Pact for the Euro marks a big step forward, more can be done. Therefore, EFRP would like to convey the following recommendations to the European Council taking place on 24-25 March 2011:
1. The long-term view of public finances should be integrated into the Stability and Growth Pact. The excessive deficit procedure should not only consider funded pension systems on a permanent basis, but also in a symmetrical way to diminish the incentive to reverse reforms. The medium term budgetary objective should be explicitly linked to the sustainability indicators developed by the Commission.
2. The Member States should increase their commitment to price stability by issuing more index-linked bonds to put an end to governments speculating on higher inflation. This would enable pension providers to protect citizens’ oldage income against inflation better. At the EU level, the European Financial Stability Facility (EFSF) – and its successor the European Stability Mechanism (ESM) – could finance itself by placing inflation-linked bonds.
3. Last but not least, EFRP feels that the European Council should aim for greater convergence towards funded pension systems. Public pension replacement rates are projected to decline by 20% during the coming decades. There is a real risk that future pensioners will demand higher benefits, exerting upward pressure on government expenditure. Therefore, in order to provide future generations with adequate and sustainable retirement income, it is essential to develop funded pension systems further.
Higher pension saving will also be conductive to the EU’s economic and social objectives, as put forward in the proposal for an excessive imbalance procedure and the Europe 2020 strategy for smart, sustainable and inclusive growth:
• Fostering funded pension provision will reduce economic imbalances throughout Europe. It will help to bridge the gap between countries with low savings rates and current account deficits, and countries with already high savings rates and current account surpluses.
• Funded systems will ensure a steady stream of long-term capital for Europe’s industry, including small and medium-sized enterprises and innovative start-up companies. Hence, higher retirement savings will contribute to investment, enhancing economic growth and job creation.
© EFRP - European Federation for Retirement Provision
