Rådssekretariatets rapport fra Komiteen for Social Beskyttelse vedrørende den fremtidige udvikling af social beskyttelse

Table 2: Projections of public pension expenditure – Current policy assumptions ⁽¹⁾ (as a percentage of GDP, before tax)

(7) The figures for the UK do not reflect the substantial increase in pensions announced recently. This change will increase the share of GDP devoted to public pension expenditure. Social assistance for pensioners has also been substantially increased and will be modified to reward private provision. The UK also has well-developed second and third pillar schemes. Taxes on future pension benefits drawn from private funds will partially counterbalance the rise in public pension expenditure.

1. For their projections, Member States calculated several parameters on the basis of their own assumptions:

• firstly, each country projected changes in employment rates (unemployment rate and active employment rate) thus providing a baseline assumption for the economic dependency ratio. This depends on the initial employment rate for women and older people, the so-called structural unemployment rates, in the event that structural reform policies are not implemented, and the effects on the employment rates of older people from pension reforms already under way;
• secondly, each country calculated implicit changes in levels of public pensions relative to earnings.

1. The expenditure projections carried out by the Economic Policy Committee show a significant rise in public expenditure on pensions. However, the projected impact differs from one Member State to another, reflecting considerable differences in their starting positions, in terms of expected growth performance, level of employment, degree of advance in the reform process and the current situation of public finances. Differences in pensions systems also lead to different perceptions of fu ture challenges.

 

2. According to the projections, demographic ageing will cause a considerable increase in the public financing of pension schemes in the majority of Member States (see table 2). For most countries (Belgium, Denmark, Germany, France, Ireland, Austria, and Finland) the increase in expenditures in relation to GDP would be between 3 and 5 percentage points; for Spain, the Netherlands and Portugal, the increase would be even greater ; Italy and Sweden would, however, show a relatively limited increase in their expenditure, less than 2 percentage points of GDP.
3. Any assessment of the social sustainability of pensions must â€“ in addition to an analysis of the effects of ageing on pension expenditure â€“ involve an evaluation of how changes in the level of public and private pensions will evolve over the long run in relation to changes in earned incomes. The Social Protection Committee intends to work with the EPC on such an assessment over the projection period.
4. Thus, particular attention will have to be paid to the contribution that supplementary retirement schemes (pension funds, life insurance, etc. - second and third pillars) can make to ensure safe and adequate income for the elderly. It will be necessary to examine their effects in terms of the fairness and solidarity of such schemes, and their economic and fiscal impact. The impact of demographic change on the investment performance of funds operated on the basis of capitalisation shou ld also be analysed. In addition, household wealth of older people could also be considered (notably with regard to home-ownership).

New employment patterns

5. Most pension systems were originally designed for households with men working full time as sole breadwinners. The increase in female employment, but also the need for increased employment flexibility, has led to the rapid development of diversified forms of employment such as part-time, temporary and agency work. Lifelong employment with the same employer is becoming less and less common.

 

6. Such flexible forms of employment already account for more than 28 % of the total number of jobs in the EU in 1999. With approximately 80 % of the total number of part-time jobs, it is mostly women who are concerned by this type of job. However, the number of men working part-time is rising fast. Half of the net additional jobs created for men between 1994 and 1999 were part-time ones. Temporary work and agency work has also increased over the last five years from 11 % to 13 %.
7. Such flexible forms of employment, which concern in particular women and young people, present several challenges to the future social sustainability of pension systems. By postponing the effective integration of young people, or by causing a precarious attachment to the labour market, such flexible forms of employment may not create sufficient provisions for future pensions of a significant share of today’s work force. Unless adequate childcare facilities and/or leave schemes a essible, women will tend to interrupt their working careers after the birth of their first or second child, thereby reducing their pension entitlements. A review of the conditions under which these more flexible forms of employment create pension benefit rights may be needed in order to provide adequate security for such workers and create incentives, particularly for women, to enter or re-enter the labour market.
8. Some Member States reflect on the new problems created by more flexible forms of employment. Spain observes that the pension level of persons with these new types of contracts tends to be below average, but that ways of adapting pension systems to this situation are currently under review. In Austria, Germany and Italy efforts have been made to bring some of these new forms of work (part-time working, home and telework, 'new self-employed', intermittent employment) within the scope of the statutory social protection system. In one of its recent reforms, Austria has extended compulsory insurance to all forms of gainful employment, adding 60000 new insured persons. In France, people in precarious forms of employment benefit from generous rules concerning the recognition of employment periods and interruptions in the old-age pension scheme. In Finland, any gainful employment that lasts at least one month gives rise to a pension entitlement under the statutory scheme.

 

Evolution of family structures

9. The number of households and families is increasing in the European Union while their average size is getting smaller (2.4 people per household in 1999, compared to 2.8 in 1981). At the same time, households are becoming less stable due to family break-ups and the de-institutionalisation of family life (fewer marriages, more unmarried unions, and extra-marital births). However, there are significant differences within the Union. In the southern Member States a significant number of la rger and more complex households can be found where different generations live together. Young people tend to remain longer in the parental home. The northern Member States are characterised by increasing numbers of young and old people living alone. Finally, the total fertility rate is below the replacement level in all Member States, but it is especially low in the southern Member States where it has been more difficult to reconcile labour market participation with family life.
10. One effect of lower fertility rates will be that older people cannot continue to rely on family support to the same extent as before. Urbanisation and increased geographic mobility reinforce this effect as more and more children will be living far away from their elderly parents. It is also to be expected that increased labour force participation of women will diminish their ability to provide care for elderly relatives to the same extent as they used to. Under these changed condition s, the effective living conditions of elderly people will to an increasing extent also be determined by their access to services (home care and specialised assistance for dependent elderly people).
11. In their responses to the questionnaire, some Member States have highlighted the effects of these important societal changes. Greece points out that traditional family solidarity used to make an important contribution to social protection, but this will tend to become looser in a more urban society with fewer descendants. Ireland highlighted the trends towards cohabitation and lone parent households. In the period 1990 to 1999 the numbers of single parent families receiving income sup port from the State more than doubled. In addition, over 30% of births were outside marriage in 1999 compared with 5% in 1980, although many of the parents will marry later. The United Kingdom, too, observes a continuing decline in marriage rates and rising numbers of cohabiting partners.

 

12. The numbers of lone parent households are also increasing, but the rate of growth has slowed down and may actually decline in absolute numbers from 2010 onwards, as the age group in which lone parenthood is most likely will shrink. The increasing number of cohabiting couples could be a reflection of the trend towards postponing marriage. This would imply that married couples with children will continue to represent the norm during the middle of the life cycle, as was observed by Germa ny.
13. Many countries feel that pensions systems need to be adapted to cater better to such diverse family patterns. Austria, for instance, particularly stresses the need to adapt pensions systems in response to increasing divorce numbers and single-parent households, but also to strengthen the autonomy of women. Sweden, Finland and the Netherlands, by contrast, consider that they are already well prepared for such changes in family structures, thanks to pensions systems that are mainly cent red on the individual. In Sweden, derived benefits are being phased out and survivors’ pensions and wife’s supplements, which are examples of derived benefits, represent a diminishing proportion of pension benefits. The previous widow’s pension has been replaced by a new, temporary and gender-neutral adjustment allowance. Sweden therefore does not foresee any problems due to changes in the family structure except to the extent that this might have adverse effects on fertility. Sweden insis al condition for maintaining a high level of employment is that parents are given real opportunities for combining careers with responsibility for their families.

 

Meeting the challenges

14. Pensions systems have a social purpose, namely to provide retired people with an adequate income. However, they can only fulfil their mission if they are built on a sound financial basis. It is therefore right that recent policy debates have mainly focused on the financial sustainability of pensions systems. The national reports on pension reforms show, however, that there is also a strong concern with maintaining social cohesion and solidarity and with adapting pensi ons systems to a changing society. This section presents some ways in which the transparency and predictability of pension systems can be improved before giving an overview on reform efforts targeted at these broad goals and tries to link them to the 10 objectives and principles identified in the Commission communication of October 2000.

 

Transparency and predictability

15. If strategies for making pensions sustainable are to strengthen public confidence they must enhance the transparency and predictability of pension systems. It is important for individuals to have a fairly clear idea of what they can expect in exchange for their contributions. Quantified targets set by the Member States relating to the main parameters of their future pension provision can be useful in that regard, but there are not many examples of this. Ireland states that its main re form aim is to establish a predictable basic level of pension rate. A rate equivalent to 34% of average industrial earnings is being discussed at present. Sweden circulates information annually to all household on pension rights accrued, with a prediction of the resulting future pension entitlement. In Finland, people are entitled to receive a record of their employment pension accrual.
16. Several Member States have adopted measures aiming at improving predictability in relation to the level of pension contributions. They have established limits/ceilings relating to the rates of contribution which will be charged on earnings, "to prevent them from soaring as a result of demographic ageing" (Netherlands). Netherlands has set a limit of 18.25% of taxable income, with a commitment to make up any shortfall from general tax revenue. Germany has made a similar commitment: Con tributions are not to exceed 20% in 2020 and 22% in 2030. This is tied to a commitment to maintain pension replacement rates at 67% (including publicly supported second and third pillar provision).
17. Belgium will establish an annual "note de vieillissement" which will set out the budgetary policy on pensions for the medium and long term, taking account of supplementary outgoings and of other social security costs. This will set out the general government policy on how to meet the costs of ageing. It will also contain statements regarding the financial position of reserve funds, expenses and receipts of the Funds. In creating pension reserve funds, Netherlands and Ireland have intr oduced legislation setting out the conditions – covering the medium and long-term – under which they will operate, e.g. no payments out before 2020 (Netherlands) and 2025 (Ireland).

 

18. Some Member States are seeking to bring extra transparency to the way 2^nd and 3^rd pillar schemes operate. Denmark has plans to publish transfer costs of such pensions, starting this year. An important dimension of this issue has to do with measures to ensure the security of private pension schemes. UK, Ireland and Netherlands report on their extensive legislative mechanisms governing the conditions under which schemes can operate.
19. Austria expressed an interest in a policy exchange with other Member States on how to create clear long-term goals and targets regarding, for example, maximum contribution levels, net replacement rates, poverty rates, the weight of different pillars.

Safeguarding the financial sustainability of pensions systems

20. Whatever their methods of organisation and financing, all pension schemes transfer resources to pensioners by drawing on wealth currently produced. The problems that confront pensions systems are to a large extent the result of a gradually deteriorating balance between the size of the working population and the number of pensioners. In the face of rising unemployment from the 1970s to the early 1990s, lowering the effective retirement age, or otherwise encouraging the early withdrawal from the labour market, became, for most countries, an instrument for regulating the labour market and alleviating the immediate social consequences of industrial restructuring.
21. While such strategy is today under review in most Member States, the idea that increases in life expectancy should be shared between extending the pension period and extending the period of active employment is still far from being widely accepted. If the strategy to make pension schemes sustainable is to gain credibility, it must address the root of the problem, which is the growing imbalance between the number of those actively employed and the number of pensioners. A failure to do so would force decision-makers to arbitrate between generations by deciding how much those in employment have to contribute and how high the living standards of those in retirement will be. Such choices, openly focusing on the income distribution between generations, could prove damaging for the cohesion and stability of our societies. While sound budget management today can certainly increase the financial resources available in the future, the first priority must be to address the issue of how to increase the level of employment.

• The impact of improved employment performance

1. The Social Protection Committee is pleased that both the Commission's communication and the Economic Policy Committee's report emphasise the importance of the Lisbon strategy, which consists in mobilising all the potential of available labour combined with sound macro-economic policies and growth-enhancing structural reforms creating a favourable economic and business environment. The success of this integrated strategy set out at the Lisbon Summit will be vital for future sustainabil ity of pension schemes.
2. Conversely, the reform of pension systems can make a major contribution to higher employment rates if incentives for labour market participation are improved. The Social Protection Committee therefore welcomes the Stockholm European Council's call upon the Council and the Commission to report jointly, in time for the Spring European Council in 2002, on how to increase labour force participation and promote active ageing.
3. The European Council in Lisbon concluded that, on the basis of economic growth of 3% of GDP in coming years, Member States should approach a total average employment rate of 70% by 2010, with the rate for women being over 60%. The Stockholm European Council added to this a specific target for the employment rates of women and men aged 55 to 64 which should reach 50% by 2010.
4. The Economic Policy Committee has developed a scenario on the basis of the Lisbon targets and has asked Member States to make another projection of public expenditure on pensions in accordance with that scenario. The scenario assumes that structural policies are implemented and are successful, resulting in major increases in the employment rates and substantial reductions of the unemployment rates. The benchmark corresponds to the average of the three Member States recording the best performance in this area during the second half of the 1990s. The total employment rate would reach 83% in 2045. The Economic Policy Committee's report emphasises correctly that such an objective cannot be achieved, in most countries, without reforming pension schemes in order to provide more incentives to retire later. In addition, the unemployment rate that should be achieved according to the Lisbon scenario would converge toward 4% in 2045. Finally, a favourable assumption of the change in the number of people of working age (a high demographic assumption by Eurostat) was used.

 

5. The results of the projections on the basis of the Lisbon scenario are shown in table 3. According to this scenario, the rising share of GDP devoted to public pensions would be cut back. The move from a set of results obtained using the current policy assumptions to results using the Lisbon scenario is not straightforward, since the differences in assumptions vary with the country concerned. As an example, using the current policy scenario, the employment rates in 2050 will vary betwe en approximately 70% and 83% depending on the country, while the unemployment rate will be between 4% and 7% depending on the country. The effect on pensions expenditure resulting from the Lisbon scenario therefore depends, for each country, on the initial reference point. Any such reduction also reflects the basic choice of whether or not to include a reform of the parameters used in pension systems scheme calculations (see note ⁽¹⁾ in the table). In all cases, however, as the EPC notes, a high-employment policy as defined in Lisbon will not by itself resolve the problem of financing long-term pensions. Nevertheless, by reducing expenditure on pensions and increasing contribution and tax revenue it has to make a major contribution to addressing the financial impact of ageing.

Source: EPC

(1) For the Lisbon scenario, France assumed unemployment rates and active employment rates below the ones described above. The active employment rate is lower because no allowance is made for changes in pension eligibility requirements to increase labour force participation by the elderly. France's assumptions provide a more optimistic scenario in the medium term (around 2010-2020) whereas the opposite occurs in the longer term. Italy's active employment rates are l ower than those described in the general methodology, whereas Spain's productivity growth is slightly higher after 2035. Portugal used the mean-variant population scenario rather than the high-variant scenario.

(2) Belgium assumes an employment rate of 76.5% taking into account tighter conditions for early retirement and long-term unemployment schemes, the increase in the participation rate of women (except for those below the age of 30) and the increase in the effective retirement age. An increase in the employment rate of younger people was not assumed as this would imply lower attendance rates in education.

(3) For Denmark, net of the supplementary semi-funded scheme (ATP), the increase from 2000 to the peak year is only 1.6% of GDP.

(4) For Denmark, net of the supplementary semi-funded scheme (ATP), the increase from 2000 to the peak year is only 3.1% of GDP.

(5) Greece stated that projections would become available in January 2001.

(6) In the case of Luxembourg the current scenario is the same as the Lisbon scenario: this scenario assumes an unconstrained growth of real GDP of 4 % per year over the entire projection period which corresponds to the average growth of the last 40 years. Figures refer to the public pension scheme for the private sector and do not include the public pension schemes for civil servants and assimilated employees.

(7) For the Netherlands the second tier is quite well developed. Such characteristics have a direct positive effect on the public pension scheme by reducing the burden of ageing populations on first tier pensions. However, there is also an important indirect implication: taxes on future pension benefits (which are drawn from the private funds) are expected to be quite high and may partially counterbalance the rise in public pension benefits.

(8) The figures for the UK do not reflect the substantial increase in pensions announced recently. This change will increase the share of GDP devoted to public pension expenditure. Social assistance for pensioners has also been substantially increased and will be modified to reward private provision. The UK also has well-developed second and third pillar schemes. Taxes on future pension benefits drawn from private funds will partially counterbalance the rise in public pension expenditure.

1. Mobilising all of society's potential, as proposed in Lisbon, also implies vigorous economic, social and labour policies leading to reform. This requires, in particular, the establishment of policies to bring down structural unemployment significantly, discourage early retirement schemes, and increase the employment of women. As the Commission communication emphasises, pension schemes must also be made consistent with all other elements of the Lisbon strategy , in particular in what c oncerns the conditions for sustained economic growth, the completion of the Internal Market and increased competitiveness, to the extent that they are key contributors to its success.

 

2. Obviously, the unused labour force potential differs from one Member State to another. Denmark points out that its employment figures already exceed the Lisbon targets and that, as a result, the scope for further increases is limited, although certain groups, notably older workers, immigrants and refugees and people currently on disability pensions could contribute to a higher overall activity rate. The Netherlands and the UK also stressed the importance of helping disadvantaged group s back into the labour market, mentioning also single parents and people living in areas with poor labour market opportunities. Austria suggested that there may be scope for raising the employment rates of younger people by shortening education periods before the entry into the labour market – provided that this does not deteriorate the quality of education.
3. In most Member States, increasing the participation of women in the labour market constitutes a major lever for improving the balance between the employed and those in retirement. As regards the labour market participation of women, Ireland observes that the main obstacle is the fact that family and caring responsibilities still fall disproportionately on women. This is certainly the case in all Member States and many of them stress the need for child care and elder care services as w ell as the need to make working hours and work organisation more family-friendly. The lack of care services and of family-friendly work organisation forces many women to arbitrate between their professional careers and their family life. This may contribute to maintaining low fertility rates , hence aggravating the problem of ageing in the long term.
4. While the need for more support for working parents is universally accepted, there is also widespread recognition of the need for maintaining the pension entitlements of those whose careers suffer due to family responsibilities. It is important to avoid creating financial incentives for a complete withdrawal from the labour market. Germany, for instance, plans to uprate the pension entitlements of parents who work part-time, rather than withdrawing completely from the labour market. S ince the 1997 pension reform, Belgium has a similar measure in place: between two and five 'bonus years' are awarded to employees working part-time for family reasons. This benefit can be taken up in a flexible way, allowing the employee to choose the most appropriate type of part-time arrangement.
5. The German report also emphasised the need to reduce the pay differentials between men and women so that labour force participation becomes more attractive for women. This is obviously linked to the quality of jobs on which the Irish report drew attention. The positive impact of increased labour force participation could be significantly weakened if many jobs provide low incomes and poor employment security.

 

6. A vital question for the financial equilibrium of pension schemes is the early departure from the labour market of older workers. Since the mid-1970s, pensions policy tended to reflect labour market conditions. Early retirement was in most Member States regarded as a socially acceptable alternative to unemployment, and as an encouragement to the recruitment of young people. Thus pension systems played, to some extent, the role of unemployment insurance, albeit in a purely passive way and without any reintegration function. In the face of demographic change Member States now increasingly recognise that it is not only necessary to reduce unemployment, but also to increase employment, and accept that pension systems should no longer be used to restrict labour supply.
7. Actual retirement age or the age at which active employment ceases reflects these policies of the past and is currently appreciably lower than the statutory retirement age. In most Member States, a rapid fall in employment beginning from the age of 55 can be observed (see table 4).

Table 4: Employment rates by age group in 1999 ⁽¹⁾

Source: Eurostat - Labour Force Survey

(1) The employment levels cited above are not corrected for part-time working.

1. Member States reported a wide range of measures that should lead to a reversal of this trend towards earlier retirement. Many of them are tightening the conditions for early retirement while taking into account specific working conditions that may justify early retirement. In general, Member States do not envisage to raise the statutory retirement age, focusing instead on measures that would raise the effective retirement age. Nevertheless, countries that have yet to equalise the pens ionable ages of men and women would achieve this by progressively raising the retirement age of women.

France maintains the official retirement age in the public pension scheme at 60 while increasing the number of years that is required to obtain a full pension. Portugal has recently provided for flexibility in the age of retirement. Finland offers stronger incentives for longer working lives by raising the benefit accrual rate in the statutory employment pension scheme from 1.5 % per year to 2.5 % above the age of 60. In Sweden, collective agreements tend to stipulate a retireme nt age of 65. The reformed pension legislation no longer specifies any retirement age and the amount of the pension is based on lifelong earnings and the age at which a person starts to draw a pension. It is therefore very important that people should have the opportunity to work after the age of 65. The five parties in Parliament which supported the pension reform therefore agreed to introduce a rule allowing employees to continue working up to a later age than was previously possible. The UK Government is considering new options in how people approach retirement, such as the concept of what is 'normal' retirement age, and the introduction of more flexible, phased retirement schemes. Spain is creating incentives for workers who want to remain on the labour market beyond the age of 65, and a consensus has been reached in April 2001 with the social partners to improve the employability of older workers. Italy now offers workers with a full contribution record to work beyond the statutory retirement age and to earn additional pension rights and entitlement to assistance in exchange for their contributions. Italy’s gradual transition to a stronger actuarial link between pensions and contributions will also strengthen the incentives to postpone retirement. Austria, Greece and Ireland also stress the importance of clear links between contributions and pension entitlements.

 

2. Measures such as those presented in the previous paragraph also contribute to a general tendency towards more flexible transitions from work to retirement. Germany took a first step in 1996 with the law on the promotion of gradual retirement. The law on the further development of old-age part-time working of 1999 has improved and simplified the possibilities for a larger group of people to move gradually into retirement and combined this with additional incentives to hire new employee s. The Netherlands encourage the two sides of industry to negotiate a conversion of early retirement programmes into flexible retirement plans. A number of Member States promote part-time working of older workers as a gradual transition to retirement. This requires of course the possibility of combining income from work with pension benefits.
3. The objective of maintaining older workers longer in working life has led some Member States to adopt more stringent employment protection legislation for older workers. Finland makes employers increasingly liable for the costs of unemployment or pension benefits for dismissed older workers, and France is considering to make dismissals of older workers more costly to employers. Austria introduced an early warning system under which individual dismissals of older workers have to be not ified.
4. Some Member States, notably Denmark and Finland, have programmes aimed at making employers more aware of the potential of older workers. The UK, building on its code of practice on age diversity in employment which has set the standard for non-ageist approaches to recruitment, training and development, promotion, redundancy and retirement, is planning to legislate against unfair age discrimination in employment. This legislation will implement Council Directive 2000/78/EC of 27 Novemb er 2000 establishing a general framework for equal treatment in employment and occupation. Obviously, the transposition of this directive in national law should provide an opportunity for all Member States to improve the labour market situation of older workers. Some Member States are already considering measures that will restrict the use of mandatory retirement. Thus, the Swedish government intends to propose legislation that would make it impossible to conclude agreements requiring workers to retire befo re the age

of 67.

 

5. A major reason for early labour market exit is disability. Very often, this only prevents a worker from exercising his or her previous job, but not necessarily another one. Sweden has enacted rules that provide for ‘dormant disability pensions which allow beneficiaries to try out various jobs for a certain period without losing their entitlement to the disability pension. Luxembourg is planning to introduce a series of measures to help workers who are no longer able to exercise rrent profession to find another job. The need for disability pensions can also be reduced by adapting the working conditions to the needs and abilities of older workers. France is considering ways of adapting the organisation of work following the general reduction in working time. The government of the Netherlands, while encouraging the social partners to develop policies for a better work organisation to enhance the labour market chances of older workers, lifted the exemption granted to unemployed aged 5 7 ½ to 65 of registering with the employment office and accepting suitable work.
6. Clearly, life-long learning is crucial for maintaining the employability of older workers. Without being very specific, several Member States refer to the need for better training opportunities. The Netherlands has already introduced tax incentives to promote training.

• Sharing the financial consequences of ageing equitably between the generations

1. As the EPC analysis shows, a policy of achieving high employment levels will, in many cases, not be sufficient to prevent a substantial increase in public expenditure on pensions as a proportion of GDP. Unless additional resources can be made available through a sound management of public finances (see section 3.2.3 below) the question arises how adjustments can be made by changing the different pension calculation parameters and/or mo difying the respective weight of the different tiers (first, second and third tiers). The aim of national reforms is to ensure that the additional expenditure requirements resulting from ageing can be shared equitably between the active and the retired. It is necessary to maintain adequate income provision in old age while keeping the level of contributions and taxes at an acceptable level. A major concern expressed by some Member States in this regard is to keep labour costs of less skilled workers low.

    

2. In the light of reforms undertaken or planned, on the basis of the Lisbon scenario regarding growth and employment, most Member States express confidence in their ability to face these challenges. In their national reports, some Member States suggest that the consequences of population ageing may be less dramatic than those implied by the above projections. Some Member States emphasise an expected increase in labour force participation. Spain, for instance, recalls that strong employm ent growth recently has led to an increase in the number of contributors to social security by 3.3 million between 1995 and April 2001.
3. Other Member States stress that reforms already completed will prevent pensions expenditure from rising in line with the old-age dependency ratio. For example, Finland expects that the challenge of ageing will not have such a critical effect on pensions expenditure as might have been expected. As a result of the reforms of the 1990s and further planned measures, pensions expenditure is expected to be substantially lower in the long term (by the year 2040) than it would have been witho ut these reforms. France undertook reforms in 1993 which will curb the future increase in expenditure and which clarified the financial responsibilities of the government vis-à-vis the statutory social security scheme. Belgium pursued very cautious policies over the past 20 years, indexing pensions and earnings ceilings on prices. Furthermore, the 1996 reform, by raising the retirement age and the contribution periods for women and reducing some future benefits significant savings will be achieved. R ecent reforms in Italy will also have a very significant impact on future pensions expenditure.
4. While many national reports express confidence in the ability to meet future challenges to pension systems, most Member States recognise that further reform efforts, involving in most cases extensive modifications in pensions legislation, will be required in order to avert unsustainable increases in pensions expenditure. Sweden introduced an automatic adjustment mechanism in its legislation to ensure that the pension system remains sustainable. This mechanism foresees that assets and liabilities are calculated and reported annually. If pension liabilities exceed assets then pension indexation automatically falls behind the income index until the balance between assets and liabilities has been restored. Other countries, notably Belgium, indicate that they expect to benefit from current high primary budget surpluses which will reduce future interest payments and therefore help ensure long-term financial sustainability without the need for sharp cuts in benefit levels.

 

5. Nonetheless, further work is necessary to assess the extent of the financial challenges facing pensions systems and to monitor progress in pension reform. In this process it will be important to keep in mind that financial sustainability cannot be achieved at the expense of pension systems’ ability to meet their social goals. Reforms that only focus on financial sustainability are likely to generate social problems and political pressures for increased expenditure. Thus it is n sible to separate financial from social sustainability; one cannot be guaranteed without the other. Only a comprehensive approach to making pension systems sustainable has real chances of success. This implies considering the financial as well as the social implications of reforms, analysing the impact of ageing on all three pillars of pension systems and taking account of other consequences of ageing, particularly for the labour market, financial markets and health care systems.
6. Many Member States envisage an increased role for private second and third pillar provision in the context of ageing. However, this cannot be expected to develop spontaneously and is being supported by government intervention that may take very different forms. In some Member States, the Netherlands being the best-known example, the two sides of industry can set up supplementary pension schemes in which membership can be made mandatory. Belgium is interested in following this approach . The UK offers the possibility to opt out of the state earnings-related pension scheme (SERPS) in favour of occupational or individual schemes. Austria envisages to transform the termination allowance foreseen by labour law (an amount that depends on the length of service and which is payable by the employer at the end of a period of employment) into a transferable 2^nd pillar pension entitlement. In most Member States there is no compulsion to join a supplementary scheme, but these schemes enjoy a favourable tax status. As tax deductibility is worth more to people on higher than on lower incomes, Germany is planning to support contributions to supplementary pension schemes by low-income earners through grants.

 

7. Some Member States express confidence that privately funded pension schemes will make it possible to curb the increase in public expenditure on pensions. The UK expects more people to be entitled to pensions, thanks to increased labour force participation, and expects that many individuals will choose private pension arrangements to maintain the replacement rate of their pension rather than remaining in the state earnings-related pension system. The UK does not therefore expect an uns ustainable burden to be placed on Government resources. Denmark expects an increasing number of pensioners to be covered by second pillar schemes and a reduction in the relative importance of public pensions. The Netherlands also relies on a highly developed second pillar, while at the same time stressing the need for raising labour force participation, especially of older workers. Sweden, while introducing a partly prefunded system, acknowledges that with such schemes becoming increasingly important, pensi on levels will depend more and more on the return on capital. This means that there is a risk of greater fluctuations in pension levels, and that, in the absence of public intervention, the level of pensions may be reduced if the rate of return is low or negative for an extended period of time.
8. In spite of these reforms, the majority of Member States expect that the statutory first pillar schemes will remain the most important element of pension provision. France and Luxembourg state that the development of private sector supplementary pensions must neither substitute for the statutory system, nor develop to the detriment of it. France considers that a strong first pillar embodies a strong commitment of her society to solidarity and equality. The development of the other pil lars should only be envisaged as a complement to the first pillar and after the pay-as-you-go system has been successfully consolidated. Belgium states that it envisages a role for the 2^nd pillar in ensuring the replacement rate of pension income; however, it should not replace the 1^st pillar.The UK statement reflects a different balance: "state pensions will complement private pensions to give people a decent income in retirement". It will operate a public 2^nd tier scheme, the State second Pension, aimed at low and moderate earners and those with broken labour market participation and, ultimately, the economically inactive.
9. As the Social Protection Committee stated already in its report for the Feira European Council, the economic, fiscal and social effects of developing supplementary schemes (second and third pillar) should be examined. In particular, the issue of financial sustainability has to be considered not only in relation to public pension schemes, but also private ones.