Pension funds in Europe – Broken promises unraveling

By Henri Erti. Originally published on 2012/06/15

The main concern that can be raised against pension funds is forgotten by the public press, while economists have been warning about the next adamant bubble for years. The older generation may deserve their retirement under the palm trees, but the consequences of the current pension schemes for the generations to come are far more detrimental than believed earlier.

Figuratively speaking, the young generation, which enters the workforce, is walking on a boulevard of broken promises. Most likely, this generation will witness a substantial delay in their retirement. Furthermore, the working generations to be will contribute from their meager incomes to the existing pension funds to support the next and existing retiring age groups. In addition to such unsustainable investment schemes, which have been based on rhetorical promises rather than real quantitative calculations, young people have little chances of accumulating similar wealth due to the lack of jobs and issues in the housing markets. Unfortunately, the burden will get even heavier. As the population of the Western world ages and consequently exits the labor force, the shrinking workforce must support the expanding number of unproductive retirees.

Pointing the blame on the retirees would be both foolish and unfair. Author David Willett asked if the Baby Boomers are a lucky generation or just a selfish one. Drawing conclusions on assumptions or backing up claims using bitterness cause further tensions in the existing debates. However, it must be noted that the retiring generation is at least a careless one. Assuming that long economic growth makes future generations richer is a hasty generalization and such reasoning ultimately has led to the diminishing contributions to the younger generations from the soon-to-retire generation. For example, currently working generation, who is going to retire in soon, is not going to contribute to the future generations or open opportunities for them, rather pay to the deficits of the current system. At the same time the younger generations must face their shortcoming. Gaining education, for example in creative writing, (least likely to find a job upon graduation) until the age of 28 is utterly pernicious to the economy in the long- run, because the average time spent in the workforce ultimately decreases as time in education and retirement increased. Below is a rather pessimistic, yet truthful representation of the dependency ratio, which illustrates the current situation. During the 1950’s, time spent in education was lower than in 2004, which may propose an argument that longer education with longer life-expectancy can decrease the time spent in workforce. This pattern is also exhibited in the graph when time spent in labor has decreased during this period by close to 6 years. On top of this the time spend in retirement has increased due to the improvements in standard of living, hence people live longer and enjoy the benefits of pension funds. An increase of over 9 years spent in retirement in addition of 6 years decrease in labor is by every measurement unsustainable scheme, which is more of a ticking time bomb than severe bubble.