Europe’s demographic time bomb has been ticking for decades: the societies of EU countries are aging and people are living longer. More than a fifth of the European Union’s population is now 65 years old or older. By 2050, this figure is expected to rise to a third. The World Health Organization warned last year that by 2024, for the first time, there would be more people over 65 living in Europe than under 15s.

Despite a sharp increase in immigration over the past two decades, the continent has yet to attract enough workers whose taxes can help cover the rising cost of state pensions. Economists predict that by 2050 there will be fewer than two workers per pensioner in Europe, compared to three today.

Annual public pension spending now amounts to over 10 percent of gross domestic product (GDP) in 17 of the 27 EU countries – all but one of which are in Western Europe. In Italy and Greece, pension costs amount to over 16 percent of GDP.

Raising the retirement age angers employees

To reduce exorbitant and rising costs, several EU countries have tinkered with their state pension systems, including by raising the retirement age. France, for example, faced months of angry protests last year over plans to make older workers retire at 64 instead of the current 62.

Other European countries have gone further, including the UK, where people will be required to work until age 68 from the mid-2040s. In the UK, women previously retired five to seven years earlier than men, but the equalisation of retirement ages has sparked claims for compensation for the women affected.

“The Dutch recently reformed their pension system, but are not achieving the goals they set,” Hans van Meerten, professor of European pension law at Utrecht University, told DW. “I don’t see any necessary reforms in Germany, Belgium and many other European countries either. They are digging their own graves.”

The strain on European public finances is compounded by the fact that millions of people still do not save enough money in private or occupational pensions to supplement their state pension. Data from last year’s Eurobarometer show that only 23 percent of EU citizens have occupational pensions and only 19 percent have a private pension product. The figures vary enormously between EU countries.

A separate survey by industry association Insurance Europe found that 39 percent of respondents were not saving for retirement – the figure was even higher among women and workers over 50. Many of those who were saving for retirement were dissatisfied with the results of their investments.

Low returns and inflation put pressure on savers

“Over the last decade, the pension crisis in Europe has worsened significantly because real returns have been persistently low and not sufficient to outperform inflation,” Arnaud Houdmont, communications director of the Brussels-based investor organization Better Finance, told DW. “This has led to a significant loss of purchasing power for savers.”

Analysis by the Finnish Pension Centre found that the nominal bond yield averaged 8% globally last year. However, when factoring in decades of inflation following the COVID-19 pandemic, the yield is only 2%. Inflation in the eurozone peaked at 10.6% year-on-year in October 2022.

Houdmont said high fees, poor asset allocation and a lack of transparency in pension products were also to blame for the lower returns.

Slow introduction of the portable EU pension

To close the savings gap, the EU introduced the Pan-European Private Pension Product (PEPP) in March 2022. The program allows workers to build up additional retirement savings that can be fully taken with them when they move to another EU country. However, only one country – Slovakia – has introduced the program.

“PEPP has been in force for two and a half years,” said van Meerten. “But the large investment funds say they do not have the necessary expertise to bring PEPP products to market on their own and are therefore looking for other partners.”

The problem, say some pension experts, is that PEPP is also too complicated and restrictive. PEPP is also seen as unwanted competition for investment funds such as BlackRock or Fidelity, whose biggest clients are large Dutch, Norwegian and German pension funds representing tens of millions of European savers.

Van Meerten advocates simplifying and making the PEPP more flexible, as some EU countries do not grant the new pension system the same tax advantages as other pension products.

Several industries in EU countries – from the German chemical and metal industries to the French railways – have their own company pension plans. Almost 60 percent of German workers who pay social security contributions are registered in such plans. These plans often offer savers, especially those with physically demanding jobs, the opportunity to retire early, among other benefits.

Employees demand more flexibility in pensions

Consumers are demanding more flexibility in their investments and retirement age. The rise of neobrokers such as Robinhood, eToro and Germany’s Trade Republic, which allow users to manage their investments via smartphone apps, has effectively displaced Europe’s many cumbersome and overly complicated pension systems.

Traditional financial services providers argue that mobile investment apps lure users into taking uninformed and unnecessary risks that could hurt their long-term returns, while proponents say they have made investing easier, cheaper and more transparent.

In the future, more EU governments may allow their workers to invest part of their public pension savings directly in the stock market. This is the case, for example, in Sweden, where private pension funds have negotiated lower fees through collective bargaining, which has contributed to the growth of pension funds.

Van Meerten believes that workers would be more motivated to save if they were given more say in how they manage their investments and when they retire.

“Do you want your savings to be green? Do you want to invest in Israel or not? That is for each individual to decide. Why should the social partners or the unions decide that for you?” he asked, referring to the pension systems run by the unions.

Houdmont of Better Finance warned that there would be a day of reckoning in the medium term because there would be a “shift in the burden” from public to private pensions. In his opinion, savers are not prepared for this.

“There is a good chance that the next generation of Europeans will be significantly poorer and retire later than their older peers,” he said.

Edited by: Ashutosh Pandey