Markets & Finance

Pension Reform: Europe Wants Later Retirements


Governments from France to Spain are making a push to raise retirement ages as a way to trim pension benefits and cut deficits

Mamadou Doukowu had planned to retire in 2016 and start a life of leisure on a state pension. Now, it appears the 54-year-old Paris security guard may have to wait a bit longer to hang up his badge. President Nicolas Sarkozy wants to raise France's retirement age from 60 to 62 as he grapples with a soaring deficit. "If you've worked for 40 years, your body is tired," Doukowu says as he directs trucks into a Paris construction site. "I've paid into the system. They owe it to me."

Politicians from Athens to Madrid have targeted pension reform as a way to offset government debt. No wonder. According to the Organization for Economic Cooperation & Development, state pensions in Europe can reach 95 percent of preretirement earnings, vs. 39 percent in the U.S. from Social Security payouts (though many Americans can tap into private 401(k)s and similar tax-deferred options available to few Europeans). Retirement ages are often lower than in the U.S.: Greeks who have worked 35 years can get a full pension at 58 despite an official retirement age of 65. Says David Blake, director of the Pension Institute at Cass Business School in London: "Europe is in a fantasy world" when it comes to retirement.

With nearly everyone in Europe eligible for a public pension, governments know they need to get people to spend more years on the job. Currently, there are four workers for every retiree in Europe. That ratio will halve by mid-century as the population ages, the OECD says. The change risks leaving Europe without enough tax revenue to pay for lush pensions. "Working longer is the only solution for avoiding old-age poverty," says Monika Queisser, head of the OECD's social policy division.

As part of an austerity plan demanded by the International Monetary Fund, Greece aims to make people retire later and is curbing automatic bonuses that retirees get at Christmas, Easter, and during the summer. Spain is proposing to stop inflation-linked increases in pensions and to raise its retirement age from 65 to 67. And British workers may soon have to wait until they turn 68 before they can start getting their full pension.

The overhaul could ease the burden on public finances. The changes in France will add $24 billion a year to government coffers as pension handouts drop and income taxes rise, the Labor Ministry says. Even a one-year increase in Britain's retirement age would add $19.5 billion annually to the national budget, says Chris Curry, research director at the Pension Policy Institute in London. "There's real fiscal pressure to change the system," he says.

Unions across the Continent have taken to the streets to protest the new rules. On June 23, French workers held more than 200 demonstrations nationwide. A strike in Madrid on June 29 led to clashes with police. And Greece has been rocked by a half dozen general strikes this year, shutting down airports, ferry service, banks, and hospitals. Unions fear blue-collar workers, particularly those in hazardous industrial jobs, will suffer the most under the pension changes. "We want to overturn these harsh and antisocial measures," says Spyros Papaspyrou, head of Greece's civil servants' union.

With Europe's unemployment rate at 9.6 percent and rising, keeping older people on the job longer will make it harder for the young to get hired. And some employees already give up their work due to medical or personal reasons well before public pensions kick in. That means governments may need to pick up health-care costs and even some welfare benefits, so the savings from later retirement could be less than expected. "Many people stop working because they've just had enough," says Krzysztof Hagemejer, coordinator of social security policy at the International Labor Organization in Geneva. "Raising the retirement age won't solve that problem."

The bottom line: As European governments seek to cut budget deficits, they're planning to raise the retirement age and trim pension benefits.

Mark Scott is a correspondent in Bloomberg Businessweek's London bureau. With Carol Matlack and Natalie Weeks.

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