EUROPE - European Commission officials have produced a report which claims the ability to meet public pensions liabilities is a higher long-term risk for governments than ever before and in most cases reform of member states’ pensions systems is desperately needed.

The 175-page report is an updated version of the 2006 Sustainability Report investigating the long-term sustainability of public finances but warns since its last study 12 countries now have ‘high risk’ status in terms of the cost required to finance their long-term public pension liabilities and “the projected impact on public finances of ageing populations is anticipated to dwarf the effect of the crisis many times over”.

In order to address the problem, Marco Buti, director-general of economic and financial affrairs, argued while the recent economic crisis has improved somewhat, a three-pronged strategy of deficit and debt reduction, increases in employment rates and reforms of social protection systems were now “indispensable for most EU members”.

One of the key arguments the DG made was retirement ages need to increase in line with life expectancy gains as age-related public expenditure is projected to increase by 4.3 percentage point of GDP by 2060 in the EU. The current regimes mean the average age at which people exit the labour market will rise from 62 to 63 by 2060 yet life expectancy after that retirement is likely to increase by six years over the same period, from 20.6 years to 26.2, said the authors.

At the same time, however, the report noted some member countries are trying to tackling the longevity issue by raising retirement ages.

A closer analysis of individual countries revealed those EU-25 members who were reviewed in 2006 have seen their gap between budgetary constraints and the actual expenditure needed rise from 3.4% of GDP to 6.5%.

In all cases except Greece, Luxembourg and Malta, the increased gap was created in the main by the economic crisis, whereas a weak budgetary position is the reason why Spain, Greece, Ireland, Latvia and the UK will see sustainability funding increase to over 5% of GDP.

It was noted that Bulgaria, Denmark, Estonia, Finland and Sweden all have relatively stronger budget positions, so were deemed to be low-risk to their financial status.

Belgium, Germany, France, Italy, Hungary, Luxembourg, Austria, Poland and Portugal are all seen as being medium-risk, although each country has different issues to tackle either in relation to existing pensions regulation or debt levels.

Those countries whose regimes are listed as high-risk in terms of sustainability include The Czech Republic, Cyprus, Ireland, Greece Spain, Latvia, Lithuania, Malta, the Netherlands, Romania, Slovakia and the UK because in many countries their age-related expenditure is expected to climb quickly against existing financial imbalances.

“This indicates that closing their gaps will require both ambitious consolidation programmes that reduce debts and deficits in the coming years, and profound reforms of social protection,” said the report, especially as for countries such Ireland, Greece, Latvia, Spain and the UK “avoiding exponentially increasing debts is a policy challenge already in the medium-term perspective”.

A full review of the analysis is available on each EU member country within the report.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

Topics