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| SSP No. 28 |
January 2, 2003 |
Retirement Finance Reform Issues
Facing the European Union
by William G. Shipman
William G. Shipman is chairman of CarriageOaks Partners LLC and co-chair of the Cato Institute Project on Social Security Choice. An earlier version of this paper was prepared for the European Commission in 2001.
Executive Summary
Changing demographics are forcing countries
around the world to reexamine their public
pension systems. The member states of the
European Union are no exception. Indeed, the
EU nations are among those facing the greatest
social, budgetary, and economic challenges as a
result of their aging populations. Therefore, EU
members will be forced to rethink their public
pension programs and move away from traditional
pay-as-you-go (PAYGO) pension models
to new systems based on savings and investment.
The need for pension reform has engendered
heated political debate in Europe. In many ways
that debate mirrors the debate over Social
Security reform in the United States. This paper
examines many of the issues involved in
reforming European pensions and reaches the
following conclusions:
- Long-run data from many countries show
that the yield on market assets is sufficient
to provide adequate retirement income at a
reasonable cost. Indeed, such income is
likely to be significantly higher than
income that can be provided through
PAYGO systems.
- Amarket-based system would not necessarily
reduce the redistribution that some
Europeans consider an important characteristic
of EU pension programs. Moreover,
those programs may be far less redistributive
than commonly believed.
- Moving to a market-based pension system
can help promote labor market flexibility
by more closely linking contributions and
benefits. In addition, a market-based system
would eliminate incentives for older workers
to leave labor markets prematurely.
- Although transition financing would be a
complex issue, it is cheaper to move to
market-based systems than to continue current
PAYGO systems. It is possible to
design a transition scenario that is a winwin
situation for all generations.
- Administrative costs in a market-based
system can be kept low.
- Market-based systems would increase
asset ownership and give workers greater
control of the wealth-producing assets of
society.
Given those conclusions, EU member states
should begin the transition to a market-based
system of pensions as soon as possible.
Index of Social Security Choice Papers
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