Pension Systems in the EU

Pension systems differ throughout the EU-27 as each system reflects in a certain way a specific institutional arrangement. But all of them face similar challenges in particular with regard to the phenomenon of an ageing population.

- Directorate general for internal policies, Policy department A : Economic and scientific policy, Pension systems in the EU – contingent
liabilities and assets in the public and private sector
, European Parliament, October 2011, available here.

Pension systems differ throughout the EU-27 as each system reflects in a certain way a specific institutional arrangement. Still there are some features which most of these systems contain, and similar developments can be observed as many Member States are
faced with the same general challenges regarding pension sustainability and adequacy. In general, it is useful to distinguish different pension pillars : a public mandatory old-age pension, occupational pensions and private savings plans. The main structure is common across all pension systems. However, the size of each pillar depends on the institutional context of each Member State and therefore differs across the EU.

Pensions within the first pillar are often based on the pay-as-you-go principle (PAYG) where contributions and taxes of current workers are used to finance (often earnings-related) pensions of current pensioners. In many Member States public pension systems entail
minimum pension arrangements to alleviate old-age poverty. The so-called pillar 1bis has grown recently as some countries have switched part of their social security pension schemes into funded pension schemes. Provision and participation in the first pillar pension
scheme is usually statutory. Nine of the 27 EU Member States switched part of their social security pension provision into statutory funded pension schemes.

Savings within the second pillar aim to provide retirees with an adequate replacement rate which is more advantageous than the pension level provided by the first pillar alone. Occupational pension arrangements may be voluntary or mandatory while some Member
States have both types. Nonetheless, not all Member States have occupational pension schemes.

The third pillar represents individual private pension schemes. Usually, private pension schemes are voluntary, but in most Member States with a third pillar private savings are encouraged via tax subsidies.

Although each pension system differs from Member State to Member State, all of them face similar challenges in particular with regard to the phenomenon of an ageing population. Those demographic changes are due to low fertility rates and increasing longevity and will
lead to a change in the old-age dependency ratio between the population aged 65 and over and working-age people between the age 15 and 64. This means that the EU-27 would move from having 4 persons of working-age for every person aged over 65 to a ratio of
only 2 to 1. As a result, the increasing dependency ratio puts a strain on the government budgets of each Member State. One way to make pension systems less vulnerable to future pension liabilities has been to strengthen the second and the third pillar, i.e. by transforming pension systems into multi-pillar arrangements.

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Pension systems in the EU


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