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Aging Europeans Fear Pensions Will Go Bust

As baby boomers near retirement, nations brace for a financial debacle. Trimming payouts, boosting age to collect are debated.

October 19, 2003|John Leicester | Associated Press Writer

PARIS — After decades as a teacher, Francelise Madassamy envisaged a leisurely retirement in southern France, with occasional trips to Guadeloupe, the French Caribbean island where she was born.

But her dreams have been clouded by new pension cuts, the government's response to an aging crisis looming over France's retirement system. Because of the cutbacks, she'll navigate her golden years with tightened purse strings, retiring on about $1,725 a month -- about $345 less than she expected.

"I'll have to make fewer trips -- I'm already traveling less now," said Madassamy, 50, who aims to stop working at 60. "I'm having to think about retirement differently."

Giving new meaning to the term "Old Europe," countries from France to Germany, Italy to Austria and beyond are grappling with a gargantuan problem: Millions of post-World War II baby boomers are trooping toward retirement, and their governments can't foot the astronomic pension bill.

For politicians, experts say, the choice is stark: Reform pensions now or risk crippling economic, social and even political costs down the line.

"The more you wait, the more difficult it becomes," said Robert Holzmann, an Austrian economist at the World Bank. Failure to reform will force cutbacks that would "hit those who have the least capacity to react -- who are the old and the very old."

Such warnings don't sit well with powerful trade unions and Europeans steeped in the idea of the state providing amply in old age.

Italy's three largest unions are calling for a four-hour general strike Friday after Premier Silvio Berlusconi said on prime-time TV that without reform, "the state won't be able to pay pensions, and the elderly won't be able to live on their pensions."

In Germany, Chancellor Gerhard Schroeder claimed a symbolic victory on Friday when lawmakers approved billions in tax cuts and agreed to begin overhauling an entrenched welfare state that has weakened the world's third-largest economy.

The votes by the lower house of Parliament were a boost to Schroeder's politically dangerous plan to scale back Europe's most generous welfare system.

Sporadic strikes over welfare hobbled transport and schools in France this spring, and in June, retirement reforms sparked postwar Austria's biggest strike.

"What's happening in Austria is not reform. People are just going to be denied what they deserve. I have to face the fact that I'll not have the money to pay for my basic needs," said Peter Preisinger, 42, a computer specialist in Vienna.

Aging is a planet-wide phenomenon. The number of people age 60 and over -- 606 million in 2000 -- will hit 1.9 billion by 2050, outnumbering children for the first time in history, the United Nations estimates.

It's a problem familiar throughout the industrialized democracies, from Japan to the United States. Europe, however, is particularly challenged because it is among regions aging first, its pension benefits are sometimes exceptionally generous, and they are often financed by current workers.

Such schemes were fine when workers greatly outnumbered retirees. But that's no longer the case. After the postwar boom, birth rates plummeted. The result is that by 2040, across the 15-nation European Union, there will be just two working-age people per retiree, the World Bank estimates. That's half the current ratio of 4-to-1.

By 2000, the EU was already spending a whopping 12.5% of gross domestic product on pensions, the Eurostat statistics agency says, and above that average in Italy (15%), Germany, France, Austria and the Netherlands (13-14%).

For the United States, which has a generally younger population and a large immigrant work force, the figures are slightly better. As long as the country takes in about 1 million new immigrants each year, the working age-elderly ratio, now more than 5-to-1, is projected to drop to just under 3-to-1 by 2040, the U.S. Census Bureau says.

Several governments have adopted or are proposing making Europeans work longer.

Today's 65-year-olds are healthier than those of 30 years ago, said Holzmann at the World Bank. "You have to adjust to reality and the realities are great: We are living longer."

Austria's government stands to save billions with its decision to phase out early retirement and make the pensionable ages of 65 for men and 60 for women standard.

In August, German government-commissioned experts recommended raising the age of retirement with full benefits from 65 to 67 by 2035. Many now retire in their late 50s; the average is 60.

Some younger Europeans are resigned to change.

"The system cannot be considered wrecked; it's just that it needs to be updated," said Giancarlo Delle Cese, 25, an engineering student in Rome. "We will have less health care, and we will need to look after ourselves and our individual welfare much more."

But to others closer to retirement, like Madassamy, it's like moving the goalposts as they were about to score. She went on strike for three weeks against France's cutbacks, approved in July, which by 2012 will give full pensions only to civil servants who have worked 41 years, up from 37 1/2.

The government said that without change, the system would be $112 billion in the red by 2040 and pensions could be halved.

For Madassamy, who teaches at Saint Cyprien on the Mediterranean coast, the math is punishing. At retirement in 2013, she will have worked only 37 years.

"The state decided to change the rules," she said. It "did not foresee this wave of retirees -- it made a management mistake."

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