A reassessment of the sustainability of pension reforms in Europe (2014)

Aaron G Grech


After decades of gradual expansion, the scope of Europe's state pension systems started to be rolled back in the 1990s. Policymakers across the continent became increasingly concerned about the sustainability of pensions and sought ways of reducing spending. Although the impact of these changes has yet to be felt, as current pensioners are still benefitting from previous systems, there is increasing evidence that in some cases the reforms could impact quite significantly the living standards of future pensioners. This evidence, together with developments related to the great recession, has led to a reassessment of reforms and, in some countries, policy reversals.

After describing the current role of state pensions in Europe and the changes enacted since the 1990s, this Chapter will argue for a reassessment of the concept of sustainability as applied to state pensions. Policy reversals suggest that policymakers need a broader sustainability framework which integrates both adequacy and financial sustainability considerations. In this light, this Chapter proposes a set of 4 indicators which need to be jointly considered. On one hand, policymakers need to look at how reforms could affect the ability of systems to alleviate poverty and maintain income in retirement for future pensioners, while on the other; they need to consider how reforms could change the cost and relative benefit of systems to future working age generations.

The framework is based on pension wealth estimates for a variety of hypothetical cases. This differs from the approach typically used by international institutions and national governments, which tends to focus on pension generosity at retirement for someone with a full career on average wages. This adequacy measure fails to capture the full impact of recent reforms. In many cases, these penalise more strongly those with incomplete careers, reduce progressiveness and diminish gradually the relative value of pensions over retirement.  By focusing on all prospective transfers rather than those at retirement and by looking into the interaction between entitlements and labour participation, this approach provides additional insights on the impact of reforms. Our estimates, for ten countries covering 70% of the EU's population, suggest that generosity has fallen significantly. Moreover, moves to link benefits to contributions have raised adequacy concerns for certain groups and have strengthened the need for better labour market access. Finally, though reforms have helped address fiscal challenges, in many countries pressures remain strong and further reforms are likely.

Chapter 2 (pp. 31-74) in "Pensions: Policies, new reforms and current challenges", 2014, Thom Reilly (ed.), Happauge, New York: Nova Science Publishers.