The Patchwork of Eurozone Pension Systems and Budget Constraints

• Post-war pension systems in the Eurozone were developed on the basis of two distinct logics: contributions and defined benefits. Today, all systems have become hybrid. 
   
• Faced with the demographic challenge, all Eurozone countries have undertaken various reforms of their pension system.
   
• Northern countries are now doing better on financial sustainability than southern European countries because of reforms.
   
• In all countries, a core reform has effectively raised the retirement age or increased the contribution period. The sustainability of these systems remains to be monitored over the next 20 years.
   
• Tightening budget constraints in countries with high debt levels and ageing populations are exacerbating the need for savers to build supplementary and funded pension plans.

Historically, there are two types of pension systems in Europe that emerged after World War II: the 'Bismarckian' system and the 'Beveridgean' system. The former, that originated in Germany is based on defined contributions: each worker receives a pension based on their contributions to the system during their working period. This system is generally managed by social partners. The latter was developed in England based on a redistributive principle: universal coverage funded by taxes and organised by the state – broadly called the defined benefit system. 

Since the 1980s, the pension systems in these countries have been facing the demographic challenge of an increasing proportion of elderly people in the population relative to the number of working individuals capable of financing pensions. This trend is linked to declining birth rates combined with rising life expectancy.

Pensions account for a significant proportion of public spending, but this varies greatly from country to country. In France, the financing of pensions represents a significant proportion of the State budget.

European economies have long been faced with the question of whether their unfunded/underfunded public pension systems are sustainable. The pay as you go system is based on intergenerational solidarity, and therefore assumes that a sufficient number of workers contribute (with real wages rising in line with their productivity gains). A fall in the working population or in real wages will affect the equilibrium of pay-as-you-go systems. And this problem is all the more important given that pensions represent a significant proportion of the economy (% of GDP), and that the level of debt is high.