The Future Evolution of Social Protection from a Long-Term Point of View: Safe and Sustainable Pensions

With a view to ensuring the long term sustainability of the pension systems of the European Union (EU), the Commission is launching a plan to modernise the systems. In the Commission's opinion, this pensions reform should go hand in hand with a robust economic policy and an active employment strategy.

ACT

Communication from the Commission to the Council, to the European Parliament and to the Economic and Social Committee. The Future Evolution of Social Protection from a Long-Term Point of View: Safe and Sustainable Pensions [COM(2000) 622 final - not published in the Official Journal].

SUMMARY

This communication recalls the main challenges which the pension systems will face in the long term and proposes a framework for analysing the challenges and policy responses. It is also intended to inform the work of the High Level Working Party created with a view to preparing a study on the subject.

Several European Councils have insisted on the challenge represented by populating ageing, and notably the implications for the safeguarding of sustainable and adequate pensions. Hence the Lisbon Council 2000 emphasised the need to modernise social protection and to study "the future evolution of social protection from a long-term point of view, giving particular attention to the sustainability of pensions systems in different time frameworks up to 2020 and beyond, where necessary".

While each Member State is responsible for its own pension system, the sustainability of pension systems will largely determine the European Union's capacity to promote a high level of social protection, which is one of the main objectives of the Treaty establishing the European Community.

A certain number of Member States have already undertaken reforms which concern the three pillars of the pension systems, namely basic public schemes, occupational schemes and individual pension plans. Reforms of public pension schemes mainly focus on controlling the growth of expenditure, whereas improvements in occupational and personal pension schemes are often necessary to allow them to play a greater role in income provision for older people.

Despite the substantial differences between the pension systems of the Member States, they have faced common challenges, notably population ageing, lower fertility rates and immigration. These challenges call for a coordination of efforts and an exchange of views and information on practices and reforms.

Ageing

The largest challenge - and it is one which concerns the long-term fate of the existing pension systems - is ageing. Over the coming decades the number of older people will rise sharply in relation to people of working age thanks to higher life expectancy and better medical treatments.

The major new development over the coming decades will be the large baby-boomer cohort, born after the end of World War II, reaching retirement age. This demographic bulge will initially be reflected in an ageing workforce, then in a sharp increase in pensioner numbers and later in increased needs for health and long-term care.

As a result of population ageing, public expenditure could rise dramatically because the large growth in the share of pensioners will inevitably require an increase in the resources set aside by the active population.

Lower fertility rates

Fertility rates are currently well below the level needed for a full replacement of the current population. Even if fertility rates tend to be higher in Member States implementing a sound policy of reconciliation of family and working life, they remain too low to prevent population ageing.

A rise could occur if some of the existing barriers and disincentives to family formation and child bearing (related notably to labour market, housing and child care) are removed.

However, immigration can contribute towards raising the level of employment, but its positive impact depends on the extent to which migrants can be sufficiently integrated into the labour market.

Guiding principles and objectives for pension reforms

It is for Member States to decide what pension system they want and what policy mix is required to maintain adequate incomes for older people without jeopardising the stability of public finances, undermining employment incentives or squeezing out other essential public expenditures. However, they share common objectives with regard to pension systems and are committed to a number of principles, amongst which are equity and social cohesion which characterise the European social model.

The Commission therefore invites Member States to co-ordinate their efforts and exchange views and information on practices and reforms, and proposes a series of objectives, viz.:

• reinforce the element of solidarity in pension systems, i.e. avoid exclusion because of low income;
• maintain the adequacy of pensions and ensure consistency of pension schemes within the overall pension system. The three pillars of pension systems, operating in combinations decided by the Member States, should enable people to remain financially autonomous in old age;
• ensure sound and sustainable public finances. Reforms must ensure that the tax burden arising from public pensions is set at an appropriate level and that other essential public expenditures are not crowded out.

The Commission also considers that to make pension systems sustainable the reforms must be comprehensive, not confined exclusively to pensions. Sound macroeconomic policies and growth-enhancing structural reforms creating a favourable economic and business environment are essential for the sustainability of pension systems.

Context

Following the Lisbon Council, which stressed the need to study the evolution of social protection, giving particular attention to the sustainability of pensions systems, three broad principles were approved in 2001 by the Göteborg Council with a view to modernising pension systems:

• safeguarding the capacity of systems to meet their social objectives;
• maintaining their financial sustainability;
• meeting changing societal needs.

The Laeken Council of December 2001 recommended that the open method of coordination should be used in the area of pensions "to help Member States progressively develop their own policies so as to safeguard the adequacy of pensions whilst maintaining their financial sustainability and facing the challenge of changing social needs."

Finally, the Barcelona Council (2002) called "for the reform of pension systems to be accelerated to ensure that they are both financially sustainable and meet their social objectives."

RELATED ACTS

Joint report of the Council and the Commission of 6 March 2003 on adequate and sustainable pensions [PDF] This report is based on the Member States' national strategy reports of September 2002, in which they present how they are trying to meet the objectives of adequate and sustainable pensions and modernisation of pension systems in the long term. The joint report was approved by the Employment, Social Policy, Health and Consumer Protection Council on 6 March and the Economic and Financial Affairs Council on 7 March and was submitted as a contribution to the European Council on 20 - 21 March 2003. The report presents a whole series of points (preventing social exclusion, safeguarding living standards, promoting solidarity, etc.) where progress has been achieved and demonstrates that the key to successful reform lies in striking a balance between social and financial objectives.

Joint Social Policy Committee (SPC) and Economic Policy Committee (EPC) report of November 2001 on objectives and working methods in the area of pensions: applying the open method of co-ordination [PDF ] This report responds to the request of the European Council to apply the open method of co-ordination in the domain of pensions policy. To this end it proposes a set of objectives and working methods with a view to creating an integrated framework for policy co-operation in this field.

Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee - Supporting national strategies for safe and sustainable pensions through an integrated approach [COM(2001) 362 final - Not published in the Official Journal]. This communication responds to the need for clear and integrated strategies to cope with the challenges of an ageing society for pension systems. Such strategies should not only focus on pension schemes belonging to the first pillar as the two other pillars will have an important role to play in achieving the overall objectives of pension systems.

Last updated: 07.03.2005