For decades the EU has been sitting on a demographic time bomb, with the average age getting older and older. More than a fifth of the EU population is aged 65 or over and by 2050 this figure is expected to rise to a third. The World Health Organization warned last year that 2024 would be the first year in history in which the over-65s outnumber the under-15s.

Despite the strong migration flows of the past two decades, the continent still needs more workers, whose taxes will help cover the rising cost of pensions. Economists estimate that by 2050 there will be fewer than two workers per pensioner in Europe – today the ratio is three to one.

At the same time public pensions annually exceed 10% of GDP in 17 of the 27 member states of the Union – 16 of which are in Western Europe. In Italy and Greece pensions cost public coffers more than 16% of GDP.

Raising the retirement age

Thus, many EU states are modifying their public pension systems, for example raising the retirement age – something that sometimes provokes an angry reaction from the world, as in France. Other European countries, such as the United Kingdom, are going one step further than France, planning to raise the retirement age to 68.

“The Dutch have also recently changed their pension system, but so far without the desired results,” Hans van Meerten, professor of European pension law at the University of Utrecht, told DW. “In Germany, Belgium, but also many other European countries, I also do not think that the necessary reforms have been made. These states are digging their own graves.”

At the same time, millions of people are still not saving money into private or occupational pension plans. According to the Eurobarometer, last year only 23% of EU residents participated in an occupational pension scheme, while only 19% have an individual pension product.

Another survey by Insurance Europe found that 39% of respondents were not saving at all for their retirement – ​​a figure that was even higher among women and workers over 50. Many of those who save, however, appear disappointed with the performance of their investments.

Low returns and inflation

“Over the past decade, Europe’s pension crisis has been greatly exacerbated by persistently low real yields, which have failed to outpace inflation,” Arnaud Hudmon, communications director at investment firm Better Finance, told DW. “And this results in a clear reduction in the purchasing power of savers.”

An analysis by the Finnish Pension Center found that nominal pension returns worldwide averaged 8% last year. But taking into account the very high post-pandemic inflation – which peaked at 10.6% in October 2022 – this figure is limited to just 2%.

PEPP: An -imperfect- positive measure

In March 2022, the EU introduced the Pan-European Individual Pension Product (PEPP), which allows workers to “build” savings for their retirement and is transferable to all EU member states. However, so far only Slovakia has implement the program.

“PEPP has been in place for two and a half years,” says van Meerten. “But the big investment funds say they don’t have the know-how to make PEPP products available and are looking for other partners.”

According to some pension experts, the problem is that PEPP is too complicated and restrictive. In addition, it presents itself as a competitor to large investment funds such as BlackRock or Fidelity, whose biggest clients are the large pension funds of the Netherlands, Norway and Germany, with tens of millions of European savers.

Van Meerten argues that PEPP should be simplified, but also ensure a greater margin of flexibility, as several EU countries do not give this new pension system the same tax advantages that they recognize in other savings products.

Several EU member state industries – from Germany’s chemical and mining industry to France’s public railway operator – have their own occupational pension schemes. Among other things, these programs often offer the opportunity for savers, especially those in the most demanding jobs, to retire earlier.

The flexibility of the pension plan is important

Consumers are demanding greater flexibility in their investments and retirement age. The rise of companies such as Robinhood and eToro, which allow users to manage their investments from their mobile phones, are looking to replace cumbersome and complicated pension systems across Europe.

Traditional finance providers counter that investment apps encourage users to take unnecessary risks without first obtaining the necessary information – harming their long-term investment returns. Supporters of these new investment platforms claim, on the other hand, that in this way investments are simplified, become financially more accessible, while there is greater transparency.

In the future it is likely that more and more EU governments will allow workers to transfer part of their savings from their respective public pension scheme directly to the stock market. Moreover, this is already happening in Sweden, where after collective bargaining the private pension funds were able to secure lower charges, thus achieving a greater development of the pension schemes.

Van Meerten believes that workers would be much more willing to save if they had more say in managing their investments and when they retire.

“Do you want your savings to focus on the green transition? Do you want to invest in Israel or not? Let the individual choose for himself. Why should such things be decided for us by the trade unions, for example?”, asks the expert regarding the pension programs managed by the trade unions.

For his part, Better Finance’s Hoodmon warns that doomsday will come in the medium term due to the transition from public to private pension savings, for which savers are not yet ready: “It is very likely that the next generation of Europeans will clearly retire poorer and much later compared to previous generations”.

Edited by: Giorgos Passas