Yves here. I’m not an expert on European budgets or pension schemes, and so am not well positioned to assess the merits of the arguments made below. However, any increase in retirement age will fall hard on workers in physically taxing jobs, including ones that “merely” involve a lot of standing. In addition, it is hard to take any whinging about budgetary necessities seriously when they do not acknowledge how the EU is perfectly willing to spend way in excess of what would otherwise be deemed affordable over the imaginary but elite-serving threat of a Russian invasion, yet pleads poverty as far as pensions and other social safety nets are concerned.
By Javier Díaz Giménez Profesor de Economía, IESE Business School (Universidad de Navarra) and Julián Díaz Saavedra, Associate Professor, Universidad de Granada. Originally published at The Conversation
In early October 2025, with his political future hanging by a thread, France’s resigned-and-reappointed prime minister Sébastien Lecornu pledged to suspend unpopular pension reforms until 2027, when presidential elections will be held.
Socialist MPs declared victory. The French business community groaned. The S&P downgraded France’s credit rating, citing budget concerns.
With France kicking inevitable reforms at least two years down the road, and many European countries facing pension crises of their own, it is worth considering how to design pension reforms that are sustainable, equitable and politically viable.
One striking feature of the debate over pension reform in Europe is how well understood and extensively documented its root problems are. Europe’s population is aging. The birth rate is declining. Life expectancy is growing ever longer. Fewer people are contributing to fund public systems that will have more people drawing money from them for longer periods of time. At the same time, technological disruption is reducing the share of labour income in gross domestic product.
Since most of Europe’s pay-as-you-go systems were designed when demographics were entirely different, they must be adjusted to reflect the current reality. We accept this in other areas like education, where we rezone school districts and trim new school construction to reflect smaller numbers of children in our neighbourhoods. But any talk of adjusting the retirement age is met with thousands of furious protesters filling the streets of Paris, Madrid or Brussels.
In France, it’s also important to put the reform in perspective: it proposed raising the retirement age by two years, to 64. Denmark adjusts its retirement age every five years in line with life expectancy, and approved raising it to 70 by 2040 from its current 67 earlier in the year.
Pension reforms keep failing because the politics overrules the economics. Demographic transitions are predictable, their costs are measurable, and the policy tools needed to address their consequences already exist. But reforms collapse when they collide with electoral incentives and public mistrust.
How to move beyond these problems? Rather than looking at only one item, such as retirement age, we propose a multidimensional approach that addresses expenditures as well as contributions and compensates those who are initially impacted by the reforms. Spain served as our case study, but the lessons hold true for many European countries, France among them.
Automatic Adjustments and One-Off Compensations
Part of the solution is incorporating new automatic adjustment mechanisms, or rules that adapt pensions according to changing economic and demographic realities. These mechanisms make pension systems more predictable and credible, and reduce their reliance on series of ad-hoc reforms that are fraught with political difficulties.
We also propose compensating the workers and retirees that bear the brunt of lowered pensions. This would be done through a one-off transfer of liquid assets from the government to households.
The downside of this policy is that governments would have to fund these payments, most likely by issuing new public debt. But as we have seen many times, reforms that are pushed through without any attempt to compensate those who lose out very often get reversed. Older voters with an eye on retirement – and there are increasing numbers of them every day – will block any attempt to cut their benefits unless they understand that they will be compensated for their losses.
Making Pension Reform Viable
For pension reforms to actually work, they should rest on five elements:
- Introduce a sustainability factor that adjusts the amount of initial pensions to the life expectancy of the cohort of the worker who is retiring. In practice, this means people who retire younger will receive a lower pension because they are likely to receive payments for more years. This creates an incentive for workers to extend their working lives.
- Introduce an automatic adjustment rule that updates pension rights and/or pensions to guarantee the financial sustainability of the system. Currently, many systems update pensions using the consumer price index. This is not sustainable, as it reduces the pension replacement rate, the ratio of pre-retirement salary to pension income. This is especially true in an environment of low or even zero labour productivity growth (as is the case in Spain).
- Calculate pensions using the contributions made during the entire working life of the workers who retire, rather than the last 25 years or some other reduced measure. Disregarding initial years worked tends to benefit top earners, and underfunds the system as a whole.
- Eliminate the caps on payroll tax contributions but maintain maximum pensions, so that higher earners pay more into the system without receiving higher pensions in return.
- Offer a one-time compensation for the workers and retirees that lose with these reforms. These compensations can be financed with public debt. This transitional component facilitates a fair transition and prevents the social rejection that often causes pension reforms to fail.
When combined, these measures not only improve the financial sustainability of the pension systems reducing future pension expenditures, but they also encourage private savings and promote longer working lives. If the reforms are announced well in advance, the cost of the transition may be lower, as households have more leeway to adjust their consumption, savings and retirement choices.
This doesn’t mean pension reforms will not create controversy. If these measures were adopted, governments would need to explain them clearly and anticipate public pushback. They would also need to make clear that without reforms, substantial tax increases will be inevitable.
The alternative, however, is worse. According to our calculations, Spain would have to raise its average value-added tax by 9 percentage points, from 16% to 25%, in order to raise enough revenues to sustain the current system indefinitely. By delaying unpopular decisions on pensions, politicians are setting themselves up for even more unpopular tax hikes in the future.
This is typical conservative spreadsheet-driven BS thinking. I don’t have time to argue each point, though there indeed would be something of interest if blue collar retirements were treated in a different way compared to white collar ones which are: 1) more expensive for the system and 2) almost certainly of much longer duration.
The proposals here would indeed break the social contract in quite an extreme way, for instance giving the same weight to let’s say 1980 and 2010 salaries. They realise how wild it is it and try to mend with an ill-defined point 5 which looks like something added just to avoid the study going directly to the bin. Breaking social contracts is now fancy and pensions don’t merit financial rescue like, for instance, TBTF. Creative solutions (QE, whatever) are applied for the later but the former must be subject to Christian sacrifices. We are not that far from ancient cultures and their sacrifices.
Indeed. I did a very cursory look into the numbers in my corner of the Vonderlayendia, and it turns out that since this system was implemented the dependency ratio has increased mere 20% or so, while “productivity” has five-folded.
Or in other words, in the 1950äs there were 1.66 people taking care of one dependent, while the ratio is now 1.33 taking care of one dependent. But those 1.3 persons earn 5 times more income than the 1.66 did 70 years ago.
Or, to put it even more bluntly, there’s now supposedly 42560 € annually for 2.3 people, while way back there was 9960 € annually for 2.6 people.
It’s almost as if the problem is more related to how the GDP is shared, and not who is contributing to it.
Such an excellent point.’ Murikans would do well to burnish it into their addled minds.
US-based data points apropos to Polar Scientists observations. Quick google search
Appears the productivity increase, coupled with lagging wage growth, might be a fly in the American ointment. As is the Baby Boom demographic ‘Old’ Wave Tsunami. Cowabunga!
https://www.ssa.gov/OACT/TR/2025/lr5a3.html (Social Security web-site Population/density)
https://www.epi.org/productivity-pay-gap/ (economic policy institute)
I’m marveling at how little attention is being paid to the dumb-bunny blather coming from power peeps making policy, that seems to ignore the huge tranches of job cuts coming due to A I, juxtaposed by policies that intimate people need to get off their asses and go get a job.
What job? And we are not really yet getting started on that trend.
Decrease age for retirement, and start looking hard and funding the Universal Basic Income that Elon’s bright future portends. Methinks he and the wealthy are not gonna be interested in funding it.
What widgets and thneeds will jobless broke folks purchase? There will be some fierce competition for bridge-deck shelters and parking spots for folks in broken-down cars without fuel.
Nevada won’t be the only State with encampments called “Jackpot”
Thanks, Ignacio and Polar Socialist. I turned up here thinking that Yves Smith had posted this exercise in neoliberalism and imitation of the Yankees as a critical-thinking challenge.
I will point out that in Italy normal retirement age is now 66 or 67. The newest budget is trying to push the age higher:
https://www.money.it/pensioni-addio-67-anni-ecco-nuova-eta-pensionabile
Further, in Italy, pensions are taxed, so much of the premise about affordability within the article doesn’t apply here. I lucked out and am receiving a nice monthly check from U.S. Social Security, but I also pay Italian taxes on it as ordinary income.
So the article above contains much defective thinking, but they will soon be guest speakers at the Peter Peterson Foundation and its pension fantasies …
https://www.pgpf.org/article/solutions-for-social-security-sustainability/
I couldn’t help but notice this blob of balderdash: “In France, it’s also important to put the reform in perspective: it proposed raising the retirement age by two years, to 64. Denmark adjusts its retirement age every five years in line with life expectancy, and approved raising it to 70 by 2040 from its current 67 earlier in the year.” Ahh, Denmark, also considering drafting teenaged women and currently trying to come up with some plan to defeat the soon-to-be-invading Russkies. That Denmark, something rotten in the state of.
I will point out that in Italy normal retirement age is now 66 or 67.
For universities it’s 70.
U.S. Social Security,
Me too. Do you have to pay the IRS as well, or are you a dual citizen?
This post was written by somebody who doesn’t understand how money works. The amount of money in an economy needs to have some consistent correlation to the goods and services being produced. Retirees still need to purchase goods and services. If they don’t, economic activity drops and the economy contracts. There is no need to heavily tax working people to fund retirees. The government could just spend it into the pension system.
Precisely. Nor do they understand that it’s not the money which is the constraint — it’s real resources, including labour. As other posters have noted, increases in productivity have exceeded increases in the dependency ratio. What will ultimately matter is whether or not society is arranged in such a way that what retirees and workers need can be produced and distributed accordingly. It’s just more of Keynes’ observation, “whatever we can do we can afford.”
Why not just start with MMT – that govt creates money when it spends. It doesn’t ‘come’ from anywhere including a warehouse full of ‘saved’ Euros. The whole thing is economically illiterate.
And creating money into pensioners deposit accounts is a great way to create money – at the bottom where it will flow into the real economy rather than at the top where it will flow into inequality – the ‘savings’ (theft) of the 0.1%.
And what about generational fairness – do we really want to keep older people in jobs while young people stay unemployed?
I favour re-education for economists like this – five years of farm labour should do the trick.
Pensions are at the nation level, not the Eurozone level. So MMT isn’t operative. These states are currency users, like say Nebraska in the US, not currency issuers.
I understand that. The ECB could refuse to issue Euros. The Eurozone has suffered too much on the basis that the ECB won’t let us. So force the issue.
The euro is a clown currency which was designed with the primary purpose of integrating the EU’s financial system as a pathway to fully integrating the European economies and removing restrictions on the free movement of money, assets and people leading to completely common tax policies throughout the EU thereby inevitably leading to full political integration. Essentially it is just another neo-liberal onanistic wet dream which leads only to bureaucratic restrictions – delivered with an angry snarl – on member nations which wish to pursue economic paths not favoured by the Commission and the ECB (ie, the Bundebank). It is a currency designed to fail because it now offers few benefits to those member states caught in it’s web other than material poverty for the many.
But if there were the political will to do so, surely the ECB could fund national pension accounts, no?
But this is the dog that did not bark! Imagine if the article had been prefaced with that explanation: that your national welfare states are unsustainable wholly and exclusive because you joined the Euro – which Tony Benn presciently denounced as a “bankers’ ramp”….
There would not be many takers there, then, for later pension ages, capped pensions, increased contributions etc.
Incisive commentary. Yet I believe that even in countries which aren’t currency issuers, if the will exists, there are financial tools or tricks that can be used or invented to mend the issue with pensions. The question is how to “find” the political will.
Yves you are obviously right but, correct me if I’m wrong, didn’t the ECB eventually behaved like a normal Central Bank monetizing debt when push did come to shove? Would it again, if enough political pressure is applied, including the threat of abandoning the Euro from some of the larger member states??
Kallas and Van der Lying presumably get there’s at the Eurozone level.
I agree that it doesn’t make sense to force older people to remain employed when young people have 15% unemployment in the EU. This sounds like another austerity justification to hold down wages by keeping unemployment high. Until near full employment is achieved, there should be no effort to raise the retirement age.
I guess it’s unimaginable that taxes on capital income, or wealth, would ever be used to fund pensions?
The Irish pension for the civil service is most barmy I have come a cross. They are made redundant at 64 but do not get a pension until 68.
The authors lost me at Pension reforms keep failing because the politics overrules the economics.
I don’t know if they are economic idiots but they are political idiots
The very existence of pensions let alone how one funds them and when and how payments are made is a political question. Individual contributions is one way out of probably very many. To be totally silly, why not fund all US pensions out of tariff revenue?
As Boshko says: I guess it’s unimaginable that taxes on capital income, or wealth, would ever be used to fund pensions?
In Europe each country has a complete different system and rules.
In my country (in Europe) the official retirement age is calculated from the
average life expectancy at 65, oficially published each year.
As the life expectancy has been increasing, so has the retirement age (aprox 1 month more each year) with an exception due to COVId excess
mortality, when retirement age actually decreased, but since then its back to a yeary increase.
In addition you face cuts and penalties for retiring earlier than the official retirement age
(aprox 15% if you retire even 1 day earlier, plus 0,5% for each month, before official retirement age).
These rules were created since the good fellas of the Troika /sarc were here, and imposed the increase of retirement age.
The most interesting thing is that these kind of prescriptions for pension sustainability, only apply to everybody else but not to the prescriptors.
For instance the german guy from the BCE in the Troika, retired at 60.
As the fish rots from the head and as the example comes from high above, the guys at our Cenral Bank (which nowadays is no more than mere branch of the BCE) are also able to retire at 60.
In my country we have a saying
“Bem prega Frei Tomás, faz como ele diz, não faças como ele faz”
“Part of the solution is incorporating new automatic adjustment mechanisms, or rules that adapt pensions according to changing economic and demographic realities. These mechanisms make pension systems more predictable and credible, and reduce their reliance on series of ad-hoc reforms that are fraught with political difficulties.”
Basically the author is proposing anti-democratic mechanisms to force austerity based on economic indicators controlled by economists and banksters. This is another attempt by a neoliberal economist to get rid of pesky democracy which gets in the way of the neoliberal economic plans that favor the wealthy parasitic class who fund these fake-economic models.
“However, any increase in retirement age will fall hard on workers in physically taxing jobs, including ones that “merely” involve a lot of standing.”
I spent all of my years before university in a thoroughly working class world. It was really quite nice during the final years of the Great Compression, when the United States made things. But when I worked in the chemical plant, it was obvious that 60 was already pushing the age limit for maintenance mechanics. Not one of these men needed regular workouts to “stay in shape.” They had me to dig the holes and carry materials and clean out concrete ditches, but they also had to climb 30-foot ladders in all kind of weather while using heavy hand tools or welding torches – sometimes while wearing a rain suit and a full-face gas mask. This was work for the strong and agile and very intelligent, requiring great skill!
My father was one of those men. He died at 55 of cancer but ten years before then he had started to really feel the wear and tear on the body. The problem with my PMC peeps is that very few of them have ever had to work for a living, using the physics definition of work as applying energy to move mass from one location to another. The English unit of of foot-pound or comes to mind, both in moving things and using a wrench (torque).
>>>The problem with my PMC peeps is that very few of them have ever had to work for a living, using the physics definition of work as applying energy to move mass from one location to another.
Yes, this is a problem, but I think it is also true that the PMC also devalues physical work, therefore they devalue the lives of the individuals doing the work as well.
Re the general argument that fewer people of working age can’t support a growing number of retirees: Wouldn’t that be true only if per-worker productivity were basically stagnant? I’m recalling charts that show worker productivity rising steadily with wages until about 1970, when wages stagnated while worker productivity continued its steady rise. So if the vast gap in lost compensation over the past 5 decades were to be recovered, the problem of supporting a growing population of retirees would be mitigated if not eliminated.
“The alternative, however, is worse. According to our calculations, Spain would have to raise its average value-added tax by 9 percentage points, from 16% to 25%, in order to raise enough revenues to sustain the current system indefinitely.”
Why does the author only consider increases in value-added tax? Why not raise capital gains taxes — or other rents imposed on society?
Besides making me angry, I read that headline as “We need a plausible-sounding excuse to cut your benefits even more – here it is”.
I had spent some time during my masters analyzing demographics so this hits home. While I agree with the commentariat that the “solutions” usually lean heavily on neolib. frameworks, the issue of an ageing society, at least a few years ago, impressed me as immense, with no easy solutions. My thesis menthor was part of a team implementing the National Transfer Accounts (NTA) methodology for my country. I recommend this to everyone interested in this topic. Specifically the work of Ronald Lee and Andrew Mason who lead the project internationally (web page: ntaaccounts.org).
Their methodology goes a bit beyond simple dependency ratios by implementing age-specific economic flows. For example they calculate an improved version of the old-age dependecy ratio called the support ratio. Which basically measures the ratio of effective labor income to effective consumption in a population, weighted by age. A falling support ratio means, ceteris paribus, a fall in total consumption that society is able to afford. As far as I know the measure incorporates productivity differences by age and I do remember talk about incorporating growing productivity in models. As far as the results go I remember the numbers were quite staggering. For the EU – a 0.5 % fall per year in max possible consumption until 2050 where it stabilised. Now this C (as far as I know) is not equatable to the C in the GDP equation, but if it were, those numbers would be immense systemic red flags.
I haven’t looked into that for years, so don’t take my word for anything. But what I do remember vividly is that back then the running mood of those trying to work on pension reform calculation was gloom and fatalism. And they were not really the neolib parrot types. It was more like – this issue need a systemic approach with a broad political consensus to be worked out. And that is not happening (paraphrasing from memory here).
People are living longer there will be more retirees more pensions will be paid so there is a choice either raise the retirement age or keep the retirement age as it is and reduce high incomes in tranches until the economy better balances wealth distribution , keeping wealth disparity as it is and raising the retirement age simply passes the buck.
https://surplusenergyeconomics.wordpress.com/
#314
Need anyone say more? All the talk about cutting costs, and none about reigning in the excessive spending – little of which actually benefits the EU citizenry.