Svobodka Kostadinova and Nickolai Slavchev

For decades, countries in Europe and beyond have been rebounding between the two ideas of privatising social security and nationalising private pension schemes. Perhaps it is high time that the EU proposed a third way.

The recent financial crisis has let loose a storm of pension reform ideas, and demonstrations against these reforms have flooded the streets in a number European countries. The question is: are the old national social security edifices secure enough to weather the storm?

Those who have been to Split in Croatia know that just before entering the town, it is amazing to see posters showing Diocletian’s palace and gardens as they used to look in the heyday of the Roman empire. But each century since has imposed its own idea of construction, piling up buildings almost chaotically. So although Split’s old town is still well worth seeing, it is definitely not functional or adapted to the modern world. The same might be said of social security systems across Europe.

What can the EU do in the sphere of social security?

At the moment, national social security administrations are trying to shore up their budgets in the face of pension deficits. And young workers from poorer EU member states are desperately looking for jobs in richer EU member states where for a couple of years of service (in addition to higher salaries) they earn first-pillar pension rights exceeding in equivalent monetary terms those of a whole working career in their native countries.

As long as those migrants pay social security contributions they are welcome in the host country. However, they also deprive their home countries of first pillars contributions desperately needed to cover pension deficits. Should a country be penalised for a budget deficit if that country fuels other EU member states’ current pension budgets through emigration of its young workforce?

The recent protests throughout Europe show that in these times of mobile labour, no national government can solve the pension problem in glorious isolation as in the nineteenth and twentieth centuries. Moreover, local decisions in one member state influence the social cohesion in other member states, and pure national solutions for the pension problem are no longer possible. Indeed, delays in national decision making or populist decisions in some countries - such as the recent retreat from pension reforms or even overt attempts to nationalise private pension schemes - fuel the uncertainty of future unfavourable demographic, economic and financial burdens. National social security administrations are becoming an uncontrolled destabilisation element in other economic sectors and are causing political and social uncertainty across the EU.

With social security administrations in other countries responsible for populations commensurate in size with that of the EU, why should it not consider an EU-wide social security administration? Such ‘internationalisation’ would be another option, alongside privatisation and nationalisation.

The European social security administration would become the EU’s first pillar, consolidating first-pillar contribution inflows and the respective pension benefit outflows in the EU.

The new European institution would receive first-pillar contributions from employees and employers according to the rules provided for in the national legislation of the respective member states. The pension payment would be made from that European institution to a EU retiree in compliance with the pension rights acquired on a pro-rata basis in the member states of the employee’s working career. National social security administrations could be scaled down to the pure technical personnel in charge of the operative details in document processing needed for the proper application of the national pension rules.

The multiple national social security administrations would be consolidated, saving administrative expenses. There would be no need to maintain multiple and various national IT systems. There would be no loss of employment career history throughout Europe, which would continue to facilitate labour mobility. As pension rights would be traced and honoured on a consolidated basis by the new EU institution, there should not be any fear about their portability. Member states would not be stealing young employees from other member states to help improve the current budgets of their national pension systems. And no one would be treated as migrant draining national resources across national borders. As a result, there would be less incentive for political games with pension rights just before national elections. The European social security administration would create prerequisites for a consistent application of an EU co-ordinated social security policy aimed at adequate, sustainable and safe pension systems in all the member states.

The national pension rules could converge gradually, or by way of a proper piece of EU legislation.

Of course, a European social security administration might also mean that richer countries eventually help poorer ones. At times, some national social security administrations would render a greater pension surplus than a deficit. Effectively, this already happens without uniform administration, through financial aid from the EU. A European social security administration would be built on the EU founding principle of solidarity, and financial redistribution would depend on adequate and accurate EU data, objective demographic trends, prudent pension right accrual rules, and stringent financial discipline throughout the EU.

Through the consolidated budget of a European social security administration, there would be no national pension budget deficits to threaten long-term economic stability. The pension budget of a European social security administration would be the indicator of the prudence and appropriateness of social security policies pursued in the EU at a macro level. No supranational EU budget deficit has yet caused the Union’s self-dissolution.

No one wants to offer twenty-first century citizens useless souvenirs of their pre-retirement income. Rather, they want to offer worthy first-pillar pension products and services. And by virtue of the Lisbon treaty, the EU now claims to have EU citizens.

That is why a thoroughly designed and well-co-ordinated EU first-pillar based on a consistent approach is needed for a sustainable growth. Such architecture could help guard the EU against the future ruins that the current random construction of national first-pillar pension models now threaten.

Svobodka Kostadinova and Nickolai Slavchev, PhD, have proposed the European Social Security Administration idea to the European Commission