Following the 2018 Pension Adequacy Report, published in April, European Commissioner for Employment, Social Affairs, Skills and Labour Mobility, Marianne Thyssen, says: “Let’s pursue our efforts to ensure adequate pensions for everyone – today and in the future”.
Some 17.3 million or 18.2% of Europeans aged 65 and over are at risk of poverty or social exclusion. With pensions being the main source of income for one in four Europeans, we need to ensure pension adequacy so that they can protect older people from poverty and keep up their living standards during their retirement years.
This is the focus of the 2018 Pension Adequacy Report, published in April 2018 by the European Commission and in collaboration with the Social Protection Committee. The report shows that despite some improvements, member states should take further steps to safeguard the adequacy of pensions. In a changing world of work, characterised by an ageing society, it should be our priority to make sure current and future retirees live in dignity.
Why does the commission focus on pension adequacy?
Demographic ageing is one of the biggest challenges that society and labour markets are currently facing. How can we make sure that pension systems are adequate and sustainable? Today, four working people support one pensioner. In 2060, the ratio will be two to one. This means that fewer people will be paying social security contributions and income tax, while they will need to support more retired people who are benefiting from the system.
On top of this, the world of work is radically changing. 40% of working Europeans have atypical contracts or are self-employed. That’s 85 million people. The average European worker now changes jobs ten times in his or her career. People move between jobs; they move between employment statuses. As a result, people pay a patchwork of pension contributions. They have gaps in social security entitlements. In some cases, they even lack coverage. That’s a problem not just for them personally – it’s a problem for all of us, because if fewer people pay into the system that puts the economic sustainability and adequacy of social security systems at risk in the long run.
Focussing on pension adequacy is not only a question of necessity, but also of social fairness. We have to ensure the sustainability of our social model and we have to ensure fairness between generations.
How is the role of pensions changing in today’s society?
European citizens today are busy managing their career, taking care of family members and acquiring new skills they need for their job. When retirement comes, they trust that the work they have put in over the years will allow them to maintain a certain living standard in retirement, or, at the very least, keep them out of poverty. The welfare state as we know it was largely designed for a society where people worked in full-time permanent jobs and women bore the brunt of caring duties, often having to rely on their spouse’s income. Jobs and family structures are rapidly changing and to continue providing adequate protection for future retirees, pension systems need to reflect these changes.
As people live longer, the relation between working life and retirement years is being redefined. These changes are broader than just pensionable age. More and more countries will open up diverse pathways from work into retirement, for instance, by allowing people to choose when to retire or to combine pension with income from work. Moreover, in this context, occupational and private pensions will have an increasingly important role in ensuring pension adequacy.
How is pension adequacy protecting older Europeans against poverty today?
Our Pension Adequacy Report shows that, indeed, many governments have recently taken reforms to safeguard adequate pensions. In particular, policies targeted at low-income pensions have become more prominent in recent years.
However, more measures will be needed in the future, as over 18% of older people remain at risk of poverty or social exclusion in Europe. Even though there are 1.9 million fewer than in 2008, there is no room for complacency. Old-age poverty and social exclusion have remained nearly unchanged since 2013 on average in the EU, with marked differences between member states. In addition, we are observing a persisting pension gap between women and men, with women facing a higher risk of old-age poverty. We should therefore pursue our efforts to ensure adequate pensions for everyone, now and in the future.
How do people’s incomes change when they retire?
When they retire, Europeans’ pensions amount to more than half of the earnings in their late career. At national level, it ranges from above 80% in Luxembourg to less than 40% in Ireland and Croatia. Overall, the capacity of pensions to replace the income earned before retirement has improved in all but three member states in the last ten years.
It is interesting to note that pensions play an important role in reducing inequalities. While work incomes can differ substantially between people, pension incomes are more equal. This is why, in spite of having a lower average income, older people face a lower risk of poverty than people of working age in most member states. Nonetheless, inequality among older people in Europe persists, and even increased between 2013 and 2016.
How can we strike a balance between working life and retirement years as life expectancy continues to improve?
With life expectancy on the rise, we need to think about how people can retire without stress and worry. Currently, the time people spend in retirement is about half of the time they spend in working life. As life expectancy continues to increase, this ratio too is likely to increase. To keep pensions both adequate and financially sustainable, it is vital to establish policies that promote longer working lives. This could be achieved by encouraging life-long learning, providing safe and healthy work environments, adjusting pensionable ages, rewarding later retirement, and discouraging early exit. Even with longer working lives, the duration of retirement is expected to increase. This poses the challenge of finding a good balance between working life and retirement, and at the same time, ensures that those who cannot extend their working lives can still retire in dignity.
Another challenge I would like to raise regarding the rise in life expectancy is that of supporting quality of life throughout the entire duration of retirement. Currently, pension incomes decrease with age, while people’s needs increase. This is also reflected in a higher risk of poverty or social exclusion for people aged 75 or over. Pension indexation and access to quality services may help to tackle this challenge.
Finally, one cannot stress enough the importance of providing accessible and understandable information about future pension rights. People should know their future entitlements to make informed decisions about how much longer to work, or how much they need to save. And of course, in this context, it is essential to ensure that people have access to transparent, safe and affordable means of supplementary pension saving.
What levels of protection will future pensioners enjoy?
People retiring 40 years from now will have a lower pension than a similar career would have afforded them if they retired today. The future adequacy of old-age incomes is therefore another important challenge that we face. Longer working lives are an essential part of the solution, but not sufficient. To truly preserve pension adequacy, pension policies need to remain up to date with the profound transformations taking place in the world of work.
Our social safety nets – of which pension systems are an important component – were designed for the more rigid and predictable labour market of the past. Today, they need to cater for less linear career paths, new types of work and an ageing society. The jobs market is changing quickly, and we need to pursue ongoing reforms to make sure that our rulebook does not lag behind. To this end, the commission has recently put forward a proposal to guarantee access to social protection for all workers, including in new forms of work and gig economy, and the self-employed. It is part of one of our initiatives under the European Pillar of Social Rights, proclaimed by European Union leaders last year. The pillar provides a compass to guide our reforms towards better working and living conditions. Pension systems have an important role to play in delivering on the rights and principles enshrined in the pillar. One of the principles stresses that workers and the self-employed have the right to a pension commensurate to their contributions and ensuring an adequate income, the right of women and men to have equal opportunities to acquire pension rights, and the right to resources that ensure living in dignity.
Which groups are particularly at risk of poverty and social exclusion?
In old age, women are at a higher risk of poverty than men in all member states. One in five older women are at risk of poverty or social exclusion, compared to only around one in seven men. But there are stark differences between member states, ranging from one in ten in the Netherlands to no less than one in two in Bulgaria. More needs to be done to narrow the pension gap between women and men; today, women’s pensions are still 37% lower than those of men. It is therefore crucial that member states continue to support equal opportunity policies targeted at women and men, in particular in the workplace.
At the EU level, I am pursuing initiatives that go in that direction, such as the recent proposal for a directive on work-life balances for parents and carers. My aim is to promote equal sharing of caring responsibilities between women and men, which is crucial for equal opportunities to acquire pension rights.
We also have to pay special attention to the self-employed and people in, what I call, atypical employment. This means that they are not working under a full-time, open-ended contract. Almost 40% of workers in Europe are either self-employed or employed in an atypical employment situation. These workers often have more difficulties in accessing and building up pension rights than people on standard contracts. We need to extend pension coverage to ensure that everyone who works can contribute to a pension system and be protected for old age. This includes Deliveroo bikers and Uber drivers, and other workers in the new economy.
Our task is to adapt accrual conditions to diverse work patterns to help more people build up adequate pension rights. The commission is working with member states to facilitate access to pension systems and to make sure that nobody is left behind.