Friday, November 26, 2004

Europe's Pension Squeeze

European realities pop pension bubbles
By Alan Cowell The New York Times
Friday, November 26, 2004

BRIGHTON, England With his crisp, gray suit, white shirt and lapel poppy commemorating the end of the First World War, Chris Shergold does not exactly seem like a vision of the future.

But for many in Europe, his story is slowly becoming theirs, reversing the assumptions that this old continent has finessed life's travails so well that its people might look forward to ever shorter working lives in ever greater comfort.

In 1997, Shergold, a 61-year-old former banker, was forced into early retirement by the merger of his employer with another bank. At the time, that seemed fine: he had a company pension, the likelihood of part-time office work and investments. It looked as if the combination would offer a generous retirement, with vacations in the sun and a good life at home.

Then, in 2000, the stock market crashed. Now he has returned to full-time work, as a financial manager for a nonprofit organization. He estimates he will have to remain there until he is 67 if he is to return to the level of prosperity he envisaged seven years ago. In other words, he said, he has discovered "that there's no sort of golden, shining cloud coming along at the end of the day."

Shergold's story goes far beyond the gravelly beaches and amusement pier of this southern English resort, which has been his home since 1976. It is a cautionary tale for his generation in many parts of Europe, as aging societies from Sweden to Spain and across Eastern Europe as well confront a demographic time bomb: With ever fewer young people to work and pay taxes, the cost of looking after growing numbers of older people with state pensions akin to American Social Security becomes ever more prohibitive.

The dream of early retirement on a well-padded pension is receding, as are other comfortable visions of the future, like the pursuit of shorter working weeks and expanded leisure time that preoccupied many, particularly in continental Europe, in the 1990s.

"They got used to having that very cushy social system and now they are slowly coming to grips with the fact that the cushy system doesn't hold anymore," said Katinka Barysch, an economist at London's Center for European Reform, a private policy research body. Or, as Shergold put it, "the majority of people will just have to stay at work that much longer."

The alternatives seem dire.

In Britain, which offers Europe's least generous old-age pensions, Adair Turner, head of the government-appointed Pensions Commission in London said, "Our problem is that we are going to have a whole lot of very poor pensioners in 30 years' time."

And in much of continental Europe, where years of social legislation have guaranteed pensions as high as 70 percent of average retirement-age paychecks, Turner said, there will be "reasonably well-off pensioners supported over a number of years that society cannot afford."

Europe's post-baby-boomers, thus, will have to save more, pay higher taxes and work longer to maintain the kind of retirement comforts that they once considered their due.

To be sure, this is not, for most Europeans, a drama of Dickensian deprivation. Consider the case, for instance, of Marie Claude Hourcade, 55, who lives in Paris and retired last February from her job as an inspector in the French customs service.

As a mother of three - a relatively large family by European standards - and a government employee, she fell into a small category of people whose retirement benefits left even her amazed.

Her pension, she said, gives her the equivalent of about $3,000 a month. This, added to the salary of her well-paid husband, offers an affluent life.

"The money enables me to have extras," she said. "I go to the theater a lot. I see exhibitions. We have a house in the countryside, where we spend the summer."

Indeed, France ranks with the Netherlands, Sweden, Germany, Italy and Spain as among the most generous of state providers, with French retirees expecting their pensions to be about 70 percent of their country's average earnings. (In Britain, the expectation is a bit less than 37 percent, compared with 45 percent in the United States, according to figures from Britain's Pensions Commission.)

But it is precisely that level of generosity that will be under challenge as Europe's population ages and ever fewer working people pay the taxes to finance the soaring numbers of pensioners.

At present, according to European and United Nations figures, people of working age in Europe outnumber people of retirement age by about three to one, compared with a ratio of about five to one in the United States. By 2050 in Europe, by these estimates, the figure is expected to be about two to one.

This expectation of change poses enormous problems. Italy's 18 million pensioners are used to drawing generous pensions after a maximum of 35 years at work. But faced with one of Europe's lowest fertility rates and some of its biggest pension bills, the government of Prime Minister Silvio Berlusconi plans to increase the retirement age by five years, starting in 2007.

Germany, with almost 20 million pensioners, plans to reduce the size of state pensions, measured against the average worker's salary.

With 12 million pensioners in 2000, France also plans to increase the number of years people must work to qualify for pensions.

Even in the former Communist countries that joined the European Union this year, low birth rates are creating a pension crisis.

"Anyone who talks about 'old' Europe and 'new' Europe on this is failing to recognize that it's a global problem," Turner said, referring to perceptions of differences between the established economies of Western Europe and those of the former Communist countries.

Of course, there are nuances. Unlike most of continental Europe, Britain has traditionally relied on its people to augment modest state pensions by saving for old age in a variety of private and company pension funds. But in recent years pension funds have lost tax breaks worth about $9.5 billion a year, stock market declines have eroded portfolios and savings have given way to a huge surge in private debt, partly because of a booming housing market.

And as private companies have limited access to generous pension schemes, more than 12 million people in Britain, one fifth of the entire population, "are not saving enough for retirement," according to the Pensions Commission.

The idea of people's working longer seems a simple panacea. After all, people generally remain healthier for longer and working until the age of, say, 67 instead of 63 or 65 may not be such a burden. But that presumes there are jobs for older people in the first place.

In Berlin, Brigitte Beyerdörfer, like many Germans older than 50, particularly those from what used to be East Germany, has found that economies are not quite so obliging.

Her husband, Klaus, is a 62-year-old former truck driver who paid into state pension plans in East and West Germany for 46 years. But he had been receiving an unemployment benefit for a statutory maximum of three years when he was obliged to go into premature retirement last Sept. 1. That reduced his pension to about $1,000 a month.

Brigitte Beyerdörfer herself, she said, takes home about $1,800 a month from her work in a Berlin employment agency. After paying bills, including the monthly rent of about $520 for their 55-square-meter, or 600-square-foot, apartment in what was once East Berlin, they manage relatively well. The problem, though, is the job market: As in other parts of continental Europe, economic growth is sluggish, to say the least.

With unemployment in what used to be East Germany running about 18 percent, "if I lost my job here I wouldn't find another," Brigitte Beyerdörfer said. "All my friends are already sitting at home. We have never thought it would be so difficult to find jobs."

Moreover, to qualify for a full state pension of $1,560, she said, she would have to work for another 10 years, until she is 65.

"As long as I work it's O.K.," she said. "If I can't, it's going to be pretty tight."