Europe Faces a Pension Reckoning Amid Aging Population and Rising Debt

Europe’s governments face mounting pressure to curb pension costs as aging populations leave fewer workers financing retirement benefits, squeezing budgets and testing political support for the welfare state.

The strain is particularly acute in France, where resistance to longer working lives has collided with rising public debt.

Across the continent, pension commitments are absorbing money needed for defense, education and infrastructure, The Wall Street Journal reported.

Most European state pensions operate through current workers’ payroll contributions rather than accumulated investments.

That arrangement becomes harder to sustain as the number of retirees grows relative to contributors.

France’s Fiscal Squeeze

French public debt has reached €3.6 trillion, compared with €2.2 trillion when President Emmanuel Macron took office in 2017. It now exceeds 117% of gross domestic product.

Pensions account for roughly a third of Education Ministry spending and 30% of the Interior Ministry’s budget, according to a recent government report.

“There is no way France can implement the needed budget consolidation without addressing the widening deficit in the pension system,” said Jacob Kirkegaard, a nonresident senior fellow at the Peterson Institute for International Economics.

Macron’s 2023 overhaul sought to increase the retirement age gradually from 62 to 64.

Passed without a parliamentary vote, it prompted months of demonstrations and transport strikes. The reform has since been suspended.

Finance Minister Roland Lescure said in an interview with the Journal and other newspapers that a higher legal retirement age was unavoidable.

The dispute also exposes the difficulty of extending careers in a labor market where older applicants struggle to find work.

Three Approaches to Retirement

France, Italy and Spain depend on pay-as-you-go systems, with state pensions replacing between 74% and 82% of previous earnings.

Pension contributions exceed 27% of gross wages in France and 33% in Italy.

Other southern European governments made substantial changes during the eurozone debt crisis.

Italy raised its retirement age to 67 in 2011 and tied it to life expectancy.

Spain extended the earnings period used to calculate benefits, while Greece cut pensions by as much as 40%.

Denmark, the Netherlands and Sweden combine a basic public pension with broadly compulsory workplace savings invested internationally.

Their pension assets amount to between 100% and 200% of GDP.

Those systems also require longer careers. Denmark links retirement age to life expectancy, with younger generations projected to work beyond 74 around 2070.

The U.K. pairs a relatively modest, flat state pension with automatic enrollment in workplace funds.

Germany retains pay-as-you-go financing but provides lower pensions than France and adjusts benefit growth as the contributor-to-retiree balance deteriorates.

Even so, Germany spends more than €110 billion annually to cover its pension funding gap, just under a fifth of federal spending.

Limited Room to Change Course

A 2023 study by economists Burkhard Heer, Vito Polito and Michael R. Wickens found France and Italy had less than 10% remaining “pension space,” their scope to raise labor taxes before damaging employment and reducing revenue.

That headroom was projected to disappear by 2030.

Moving toward investment-funded pensions presents another obstacle: workers may have to finance existing retirees while building savings for themselves.

Diverting French payroll contributions into investment funds would leave a gap that would require tens of billions of euros in additional borrowing.

For younger workers, the financing problem is becoming a question of whether the promise will survive.

“I doubt I’ll have a pension by the time I retire,” Riana Sid-Ahmed, a 19-year-old psychology student in Paris, told the WSJ.