The way to an European pension system

After reading Charlemagne's latest blog entry in The Economist, I can't help but thinking that European pension systems should be revamped. That's of course no news at all: most national governments are currently working towards that goal, with varying degrees of success and hurry. 

Greece should do it right now if it wants to at least try to comply with the bailout-like conditions imposed by the EU hardcore countries. Ireland already cut pension benefits for its civil servants, among other painful budget-cutting measures, just to avoid Greece's fate. The Spanish government has proposed a progressive raise of the retirement age from the current 65 to 67 years –to much public disdain, as showed by yesterday's demonstrations (see related article in The Irish Times)–, and France is also tinkering with its pension system, where current official retirement age is 60, one of the OECD's lowest.

My proposal would rather take it a bit further: what Europe needs is a coordinated reform of its pension systems, not just independent efforts by some national governments. Although a full-fledged handover of the national pension system to a hypothetical European authority is just a chimera, as it would require that all European (or, at least, Eurozone) governments transfer their Treasury departments and taxes to a European authority, who would then manage them. Sadly, this is a politically and socially unacceptable idea in today's half-united half-divided Europe, as it would –quite understandably– be opposed by the richest and most efficient countries, namely France and Germany, while also requiring a huge scale revamping of all national civil services, probably leading to painful cuts in redundant positions. However, some coordinated structural changes could be agreed upon, to great benefit of all European economies.

First, a consensus should be reached on a common retirement age, as the current mishmash of retirement ages in Europe only causes confusion and resent between citizens of different countries. Germans loathe having to rescue Greek finances and then realising that, while they retire at 67, Greeks do it when they are only 61. Spaniards are puzzled by their government's plan to raise retirement age when they see that most of their French neighbours retire 5 years earlier than they do, when they reach the age of 60. A common European retirement age should change these perceptions.

The second coordinated decision should come on how pension entitlements should be calculated. This is another contentious issue in several countries planning reforms, such as Spain, where pension entitlements are currently calculated on the basis of the last 15 years of the individual's working life, something the Government is also planning to change (upping it to the last 25 years). Moreover, and although it is by no means as controversial as the retirement age itself, the widely diverse calculation methods also fuel inequalities and resent between countries.

Finally, a bracket of allowable entitlements should also be defined at the European level. No external, neutral observer would deem adequate that, for instance, civil servants in Greece can retire on 80% of their final basic salary, while German ones have to work longer years to get pension rates in the low 70% range of final basic salaries. Entitlements vary quite wildly among countries and even sectors, so sensible and responsible European regulations should be called for both to improve fiscal reponsibility among some countries and also to create a further feeling of equality among all Europeans, independently from their country of origin and occupational sector. This is not to be confused with with a "hard cap" or exact retribution percentages, as room should be made for fiscally responsible countries that can afford paying more generous pensions to their citizens; however, this manoeuvering space should be limited, and any significant deviation should be supervised and approved at the European level.

As Charlemagne reports, "even the news that the Greek government was planning to raise the legal retirement age from 61 to 63 as part of swingeing austerity measures seems to have been like a red rag to a bull in Germany, which not long ago increased its legal age from 65 to 67". That's exactly the problem that such a measure would solve: reaching an agreement on an European retirement age would be the first step towards a better, safer and more stable economic and political integration. Keeping the current status quo might otherwise prove fatal for the future of the continent's public finances.

PS: Just out of curiosity: while searching for relevant articles to document this post, I stumbled upon an old article by AP published in The Independent almost 5 years ago. Guess what it said: "The European Union has warned Greece that within five years it will face a problem due to increased aging of its population." Of course, warnings were promptly ignored.