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With France and Austria being the latest countries downgraded by Standard and Poor’s, from AAA to AA+, it doesn’t help that Europe has a $39 trillion and growing pension problem. In a recent Businessweek article by Rebecca Christie and Peter Woodfield, they point out a few sobering facts:
- State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt.
- Germany accounted for 7.6 trillion euros and France 6.7 trillion euros of the liabilities.
- Economic output devoted to spending on retirement benefits is projected to rise by a quarter to 14% by 2060.
- Europe has the highest proportion of people over 60 years old in the world.
- With life expectancy in Europe rising at a rate of 5 hours per day, the number of people over 65 in the 34 countries in the Organization for Economic Cooperation and Development is forecast to more than quadruple by 2050.
Our own debt crisis infographic shows that public debt in many eurozone countries has already reached unsustainable levels.
Tough Medicine Ahead
As populations age and birth rates decrease, countries will have to make some difficult adjustments.
- Increasing the retirement age and decreasing benefits for workers.
- Governments may have to take on more investment risk to grow their pension assets, but this could backfire as hot investment sectors move from boom to bust.
- Move pension liabilities from government-funded programs to making employees responsible for their own retirement through employee-funded accounts.
Little doubt remains that public and private sector workers will have to accept changes to their retirement benefits, and share more of the burden in the years and decades to come.