Opinion of the Economic and Social Committee on "Options for the reform of pension schemes"

(2002/C 221/14)

In a letter sent by the Commission President, Mr Prodi, on 10 January 2002, the Commission asked the Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, to draw up an opinion on "Options for the reform of pension schemes".

The Section for Employment, Social Affairs and Citizenship, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 13 May 2002. The rapporteur was Mrs Cassina and the co-rapporteur was Mr Byrne.

At its 391st plenary session (meeting of 29 May 2002), the Economic and Social Committee adopted the following opinion by 102 votes to two with one abstention.

1. Introduction

1.1. At its plenary session on 29 November 2001, the EESC adopted two opinions on pensions(1), which were intended as an overall contribution to the discussion of the subject at the Laeken European Council. The present opinion makes a number of references to these earlier opinions, without quoting them at length.

1.2. The Laeken European Council took note of the joint report on pensions by the Social Protection Committee (SPC) and the Economic Policy Committee (EPC) and decided to launch the open method of coordination in the pensions field. It also stressed that the "adequacy of pensions, the sustainability and modernisation of pension systems and the improvement of access to occupational pension schemes are all of particular importance for dealing with the increasing needs(2)".

1.3. On 24 January 2002 the Commission published the report, drawn up at the request of the Stockholm European Council, on Increasing labour force participation and promoting active aging(3).

1.4. The Commission President, Romano Prodi, wrote to the EESC President, Göke Frerichs, on 10 January 2002 asking the EESC to investigate the possible options for pension schemes and assess them in terms of the sustainability of social protection, public finances and growth.

1.5. The Barcelona Summit stressed the importance of active aging and the need for measures which provide incentives for a voluntary raising of the real retirement age.

1.6. While reaffirming the views expressed in the aforementioned opinions and in others directly or indirectly addressing the problem of pension schemes, the EESC intends here to examine some of these issues in greater detail. It will focus on four aspects: social sustainability of pension schemes in relation to the new needs of the changing labour situation; measures to help prolong active life; measures to improve financial sustainability; and suggestions to accompany the launch stage of the "open method" in this field.

1.7. First and foremost, the EESC reiterates its deep conviction that any adaptation, modernisation or reform of pension schemes must be carried out with the active, aware and informed involvement of the social players, since that is the only way to create the conditions for a substantial consensus on the necessary choices to be made at national level.

2. Social sustainability in relation to the new needs of the changing labour situation

2.1. The EESC has often drawn attention to the need to ensure that pension schemes are sustainable in terms of both social cohesion objectives and the stability of public budgets. Both these objectives must be pursued resolutely by striving at national level to strike a balance between economic, fiscal, employment and welfare policies. This in turn should help to establish a satisfactory distribution between the various pension schemes (first, second and third tiers) that will make them more dynamic while also safeguarding their role in pursuing certain basic social objectives. It is only on the basis of full respect for this subsidiarity - guaranteed by the involvement of the social partners and the national institutional players - that the EESC is putting forward its thoughts on this matter, in the hope that this will spark an open and realistic debate between all the relevant stakeholders.

2.2. The requirement for national pension schemes to be able to meet workers' legitimate aspirations to spend the last stage of their lives in security and dignity is confirmed by virtually all the relevant Community documents. This affirmation must never be regarded as a generic principle, but as a basic objective to be pursued by adapting the various national schemes, and implementing the reforms needed now and in the future for demographic, social and budgetary reasons.

2.3. The EESC stresses that a proper response to the need for social sustainability must simultaneously take account of the structure of the labour market, the characteristics of work and likely future developments. Now more than ever, with the constant innovations in types of contract, it is essential to understand how the picture is likely to change in the medium term. The Lisbon strategy has shown the need to relaunch the European model of socio-economic development, involving the aim of full employment with a high skills content, in a context of greater participation in the labour market. The EESC reaffirms the need to pursue these objectives with maximum determination, as only resolute progress towards a higher level of better-quality employment can stabilise the fiscal resources needed to guarantee the function of solidarity performed by social protection schemes - a function which cannot be neglected without condemning our society to endemic problems of poverty and marginalisation. The Lisbon strategy, in contrast, seeks to combat these with a strong commitment and overcome them in the medium term.

2.4. Employment trends in the Member States show that job creation continues to be insufficient because of weak economic growth, the effects of the slowdown in the global economy, particularly since 11 September 2001, and a certain wait-and-see attitude on the part of investors. In view of the link between employment and pension policies, the Committee takes the view that the Union should adopt new development objectives and growth policies which would stimulate the economy and create a favourable context for solving the employment problem. As pointed out in earlier opinions, the scope for manoeuvre in public budgets is limited by the need to comply fully with the Stability Pact, which is designed to ensure proper management of economic and monetary union. This means that the reduced intervention potential of public funds must be carefully distributed so that social spending focuses on the development of active policies for the labour market and social protection.

2.5. Despite the growth difficulties mentioned above, nearly all the Member States have seen an upturn in employment involving in particular posts created through new types of contract (especially fixed-term, part-time or temporary contracts and forms of subcontracted work). These types of contract are relatively common in the 15-25 age group, especially among skilled workers aged between 20 and 25, and one would be justified in saying that a significant percentage of these jobs are transformed later into full-time, indefinite-period contracts. The EESC therefore welcomes the creation of new jobs and the development of new or different types of contract, but shares the concern of the Commission and the Barcelona Summit with regard to the quality of the work and the balance between flexibility and security of employment.

2.5.1. These new types of contract will continue to develop and create jobs, raising the question of how they will affect the social and financial sustainability of pension schemes, whether PAYG or funded. The contribution cover from workers with new-type contracts does not usually produce a continuous, regular flow of revenue. This affects the resources of the pension schemes and makes it more difficult for the workers in question to plan adequately and responsibly for their lives, careers and old age.

2.5.2. In particular, the problem arises of pension contribution cover in periods of inactivity or training between one contract and another. Without leaning towards one or other of the various solutions currently under discussion, the EESC stresses that any solution must meet the twofold need for security and flexibility. In putting forward its thoughts here, the EESC considers that all the options must be debated in a transparent and unprejudiced manner. The solutions must involve national choices that take balanced account both of the needs of all the parties involved and of the challenges facing pension systems.

2.5.2.1. The most obvious solution would appear to be for the state to take over cover for involuntary periods of inactivity. However, this would not solve the problem because it would increase the burdens on the public purse and it seems unlikely that these would be sufficiently offset by the extension of the tax base (direct and indirect taxation) fostered by the new types of contract.

2.5.2.2. Similarly, strengthening and broadening supplementary and private schemes might improve the balance between public and private schemes but it only shifts the problem without solving it for the worker. Indeed, a temporarily unemployed person, who does not generate revenue, will have one more problem if he/she also has to contribute to second-tier and third-tier schemes, always assuming that he/she is able and willing to join one, since as pointed out in the aforementioned opinion(4) there are certain rigidities in schemes of this kind, which are not always favourable to workers with new-type contracts.

2.5.2.3. The deployment of special reserve funds - which the EESC has already supported in an earlier opinion(5) - is one useful option, but some Member States find it difficult to free up budgetary resources, raise taxation to supply the fund, or find new sources for state budgets.

2.5.2.4. The EESC is concerned to note that according to the Commission communication on Increasing labour force participation and promoting active aging, workers on fixed-term and part-time contracts have rather high drop-out rates (15 % into unemployment and 10 % into inactivity). The EESC takes the view that these data should not lead one to make hasty judgments on the types of contract concerned, but rather to take account of the need to step up measures to reduce periods of unemployment and inactivity by judiciously combining active management of the labour market, training and efficient employment advice and guidance services. If proper training is provided for the relevant types of work, worker motivation will improve.

2.5.2.5. The EESC notes that some envisage a slight increase in employers' contributions for fixed-term, part-time and temporary contracts, suggesting a sort of trade-off between the flexibility gains this type of contract produces for businesses, and the small sacrifice made in terms of a greater contribution to general welfare. This possibility is strongly opposed by others, who believe it would amount to discrimination between different types of contract, and would only serve to discourage the use of the new forms of contract.

2.5.2.6. Another idea current in the debate is that of a general increase in contributions (from both employers and employees) with a view to maintaining and/or boosting the intervention potential of social and pension expenditure, including in the future. This idea must also be discussed, but the EESC is concerned about a possible tendency to raise contribution levels, which are already quite high in almost all the Member States, and takes the view that any proposal to increase them should be assessed in terms of its probable impact on employment. The EESC notes, in passing (and to draw attention to an important methodological aspect of the problem), the results of a recent Eurobarometer survey: a sample of European citizens was asked whether, and to what extent, they agreed with the statement that "the current level of pensions should be retained, even if this means increasing taxes or contributions". It is significant that over 77 % of those questioned agreed either "strongly" or "broadly". This does not lead to any conclusion on the merits of this type of measure, but it does bring out the fact that the European public is aware of the problems and is ready to take a direct share of responsibility for solving them. The EESC hopes that this spirit is shared by all the social players, and above all - as already repeatedly stated - that the workers and citizens of the Member States will be seriously and responsibly involved in policy choices of this type.

2.5.2.7. The EESC reiterates its concern about the position of workers who, for various reasons (including those arising from the growing trend towards new forms of contract), do not earn sufficient pension rights under present schemes following breaks in their working lives and the ensuing break in contributions. Without suggesting solutions, the EESC hopes a careful assessment will be made at national level; it points out in particular the conditions laid down by Swedish and Irish pensions law in order to deal with this state of affairs, and urges the Member States to give priority to resolving the issue(6).

2.5.3. The EESC considers that choices between the measures mooted in the preceding points and any other proposed measures could be defined through national provisions following detailed and open discussion with the social partners.

2.5.4. In any event, all types of employment contract should include full and transparent provisions on pension contributions and should contain clear information on the various opportunities, so as to enable workers to plan their working life and their pension responsibly.

2.5.5. Nonetheless, there is also a need for a European framework setting out certain guarantees regarding proper management of second-tier pension funds, and regarding the transferability of contributions between the various pension funds, thereby encouraging confidence and mobility among workers(7). This need is all the clearer after certain deplorable events that wiped out many years' pension contributions made by employees of firms which had mismanaged second-tier resources by developing irresponsible financial strategies. Although these are only isolated cases, the public alarm which they generate does not encourage workers to contribute to this type of pension scheme, nor to engage in new types of contract.

3. Measures to help prolong active life

3.1. The EESC has already devoted much attention to this subject in earlier opinions(8), maintaining among other things that raising the official pensionable age must correspond to the rise in life expectancy, but can never be the only response to the problems raised by the increase in levels of dependency and to the difficulties of public budgets. Nor is it enough to offer tax or other financial incentives to encourage the worker to go on working(9). Anyone who has spent a lifetime in a job which is exhausting, often relatively unskilled, and provides little job satisfaction, can rightly expect to receive a pension in line with the possibilities offered by national provisions; other workers, too, might prefer to give up a working life for a variety of reasons. In this connection, the EESC also wishes to stress the importance of getting to grips with the increasing rate of exclusion on grounds of ill health. The voluntary principle must always be upheld and safeguarded, subject to the development of adequate incentives. The EESC approves the Barcelona European Council's recommendation to raise the average effective pensionable age by five years by 2010. The reason why the EESC supports this objective is that the impact on the financial sustainability of public pension schemes could be very positive: a study by the ECFIN DG shows that prolonging working life by one year would lead to savings equivalent to 0,84 % of GDP. The objective set at Barcelona of raising the effective pensionable age could be achieved by combining measures to discourage the current trend towards early retirement with measures to encourage workers who reach the legal retirement age to remain at work on a voluntary basis (although not necessarily in the same post or with the same function).

3.2. The EESC does not wish to criticise national provisions which, in some Member States, allow workers to cease employment before they reach pensionable age. It would, however, suggest that the Member States make an overall assessment of end-of-career schemes - of which early retirement is one aspect - taking account in particular of the negative impact which they can have on state budgets, of possible alternatives to early retirement schemes(10), of the impact on labour relations, of the relationship with legislation on pensionable age and of the motives of workers. In this context, the EESC feels that, except in the case of exhausting jobs, early retirement practices should, in time, be brought to an end and in the meantime should be limited to cases of absolute necessity where there are no feasible alternatives. The EESC stresses in particular the need to make every effort, where there is an excess of manpower, to find adequate alternatives to early retirement, such as mobility towards other companies or sectors, retraining to meet new production requirements, or outsourcing, the latter being an extremely attractive and creative practice that is still not widespread enough.

3.2.1. The EESC also stresses the need to increase participation in the labour market by older workers, and in particular to take all necessary measures to encourage their re-employment after they have become unemployed, by making them more employable (training measures, recognition of skills, experience and capabilities whether certificated or not, guidance etc.).

3.3. In its recent Communication on "Increasing labour force participation and promoting active ageing", the Commission analyses in detail the importance of the reasons which can lead workers to remain active. In particular, the prolongation of employment should be combined with specific training measures and with a clear flexibility in working hours, as is being explicitly requested by many older workers. Moreover, it is likely that, given the rise in life expectancy, a worker may prefer to remain at work for social reasons and for personal development rather than for purely economic reasons. The EESC therefore takes the view that working conditions and the position occupied in the firm should also be covered by ad hoc measures, planned around the needs and potential of the workers concerned and accompanied by new measures for involvement and participation (in profits, decision-making, collateral activities etc.). Workers who still feel useful to their employer and colleagues, and who feel that they still have skills and potential to offer, will be happy to remain at work and when they actually do retire will retain an active and responsible outlook as a pensioner. Of course, the goal of promoting active ageing means that human resource management and development strategies will have to be expanded and better targeted, with greater involvement of workers right from the start of their careers.

3.4. Since measures to promote active ageing must meet the needs of all players in the firm, it is difficult to conceive of their being regulated in detail by national laws. However, if the firm is adequately supported by a balanced national regulatory and fiscal framework, the finer detail of the measures to be taken could be settled in negotiations between the parties at sectoral, regional or company level.

3.5. The EESC imagines that, in the context of the European social dialogue and of corporate social responsibility, there is scope for negotiated strategies to be sought which help to prolong active life. These strategies could be applied autonomously by the parties at national level, thus providing significant additional material for the benchmarking of best practice to be verified using the open method of coordination.

4. Measures to improve financial sustainability

4.1. The financial sustainability of pension schemes is a vital objective for ensuring social sustainability and must therefore be pursued in a balanced way, through an appropriate mix of policies and measures. The EESC is fully aware of the importance of this challenge and in no way underestimates the impact of the negative demographic trend in the Member States and candidate countries, which is increasing the dependency rate. Europe is an ageing continent(11), and the costs of this could impact seriously on future generations. The cumulative effect of expenditure on pensions and health poses serious potential problems for state budgets, because demographic trends are not reversed in the space of a few decades. However, the EESC feels that it is pointless, and in some cases actually damaging, for the media and some political and government circles to respond to the publication of economic and demographic studies with alarmist stances that focus solely on the risk of instability which an uncontrolled development of public pensions would represent for state budgets. But the EESC also criticises the reassuring attitude of denying, in the face of all the evidence, that the financial sustainability of pension schemes is a challenge to be taken very seriously. Incidentally, the EESC points out its earlier views(12) on the already obvious (although not in itself decisive) contribution of migrant workers to the financial sustainability of pension schemes, provided that such workers are taken on under proper conditions and enjoy equality of treatment with workers who are Member State nationals. The EESC therefore reaffirms the need for more resolute steps towards a fair, far-sighted Community immigration policy, and would point out that in the last two years, one out of every four new contributors to the Spanish social security system has been an immigrant from a third country.

4.1.1. The practice of tax evasion, not generalised but unfortunately quite frequent, is damaging to workers (lack of cover), honest entrepreneurs (unfair competition) and state budgets (lost tax revenue). The EESC takes the view that the Member States should take much more determined action to overcome this problem as soon as possible.

4.2. The EESC thinks that these issues must be addressed in a carefully balanced manner, so as not to arouse mistrust and fears among the public or issue soothing messages. The EU's citizens are mature adults who realise the difficulties of the situation but who must be involved in the debate on major issues and helped in their legitimate desire to secure prospects for their old age. Here it is worth noting that the abovementioned Eurobarometer survey showed that the vast majority of people in all the Member States view the situation realistically and with a sense of responsibility, and have a lucid and balanced picture of their future pensioner status.

4.3. The problems must always be viewed from a dynamic standpoint. The EESC points out that many Member States have already introduced, or are preparing, reforms designed to improve the financial sustainability of their pension systems; analyses which do not take account of the gradual impact of these reforms over time could therefore lead to (possibly serious) errors in the forecasts.

4.3.1. In nearly all the Member States which have already carried out pension reforms, eligibility conditions have been tightened up, and in some cases the amounts paid have been reduced. These operations must display the requisite financial rigour, but must never fall short of the solidarity objective of public pension schemes. Nor should they be subject to constant unforeseen adaptations, without adequate trial periods. The EESC reaffirms the need to encourage workers to share the responsibility for planning their careers and their pension expectations, but this can never be achieved by continuing to modify benefits (downwards) or by unilaterally imposing stricter conditions for the right to draw a pension.

4.3.2. Some of these reforms are already yielding results and have shown that the risk of negative effects on public finances can be significantly reduced. The reform of the Italian pension system in 1997, although leaving room for improvements, already suggests that Italy will be one of the European countries least affected by changes in expenditure (only 1,7 % between 2000 and 2050). The Commission projections - and those of some private research bodies - expect that Sweden too will have an extremely modest spending "peak". Both Sweden and the Netherlands are interesting examples of how the balance between the different schemes is also beneficial for the sustainability of the public schemes and is better able to contain spending in absolute terms. The problem of the "expenditure peak" should not be overestimated, but has to be examined from several standpoints and in conjunction with the problem of the level of pension spending in relation to social spending in general and the GDP: according to the Commission projections, the Member States could face an increase in average pension expenditure corresponding to 3-4 % of GDP, but in some States this figure could reach 6 % or 7 %, which are clearly significant and worrying percentages. The EESC stresses, however, that this "peak" has a different meaning from one country to another; it should be carefully assessed in relation to specific national conditions. For example, in a country for which a significant "peak" is foreseen, it would be necessary to consider the health of the public finances, the potential for growth of the tax base, the soundness and proactive nature of the social protection policy, pensioners' quality of life in comparison with that of workers, the general level of development, the capacity to iron out social and regional inequalities, and the likely duration of the "peak". In this context, the capacity for recovering from the "peak" and the time taken to do so appear to be as important as its magnitude(13).

4.3.3. The EESC reiterates its firm conviction that the most advanced, balanced and acceptable reforms are those which arise from joint planning involving the social partners and governments (see the recent EESC opinion on "Supporting national strategies for safe and sustainable pensions through an integrated approach"(14).

4.3.4. Careful analysis of the documentation now available reveals interesting data which can suggest innovatory, flexible and effective solutions. A study by the ECFIN DG(15), for example, shows that a gradual increase of 5 % in the labour market participation rate could lead to savings amounting to 0,5 % of GDP, and that prolonging working life by a year would entail a saving of 0,84 % of GDP. As stated in point 3.1 above, measures to prolong working life must safeguard the voluntary element, but if a significant percentage of workers could be sufficiently motivated to remain active, perhaps even for two or three years after reaching pensionable age, the benefits could accumulate.

5. Suggestions for launching the "open method" in this field

5.1. The ideas set out in the points above, which could supplement political options on pension reforms, nearly all relate(16) to initiatives to be taken at national level, the efficiency of which would be increased by comparison and examination using the "open method". The EESC would emphasise the potential of this method for finding innovatory solutions, for refining the capacity for analysis and comparison among the Member States, and for ensuring the joint endeavour to achieve the social and financial sustainability of pension schemes. Moreover, the EESC reaffirms the need for substantial, continuous involvement of the social partners (especially at national level) on the one hand and of the applicant countries on the other, as stated in the aforementioned opinions.

5.2. In this context, it is essential to develop forecasting indicators which take progressive account of the reforms being made, and which can be used to gauge whether pension schemes effectively correspond to social needs, the gender dimension, trends in the labour market and the macroeconomic and budgetary conditions of the Member States. Alongside the data and analyses in national reports, this could provide a framework of indicators accepted by the Member States as a way of regularly verifying not only the effects on the budget but also the resulting social developments.

5.3. As to the subjects for debate, the EESC suggests that priority be given to the question of incentives and reasons for prolonging working life, and to the development of accurate benchmarking of best practice in this field.

5.4. Finally, the EESC points out the need to involve the applicant countries as soon as possible in developing the open method of coordination on pensions, emphasising that the considerable diversity in the systems of the future member countries, as well as the diversity in macroeconomic and income conditions, will pose new problems, but will also offer significant opportunities for those countries to cooperate and integrate with the European model of economic and social development.

Brussels, 29 May 2002.

The President

of the Economic and Social Committee

Göke Frerichs

(1) On Economic growth, taxation and sustainability of pension rights in the EU (OJ C 48, 21.2.2002 ) and on the Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee: Supporting national strategies for safe and sustainable pensions through an integrated approach (OJ C 48, 21.2.2002).

(2) Presidency conclusions, point 30.

(3) COM(2002) 9 final of 24 January 2002.

(4) Opinion on Economic growth, taxation and sustainability of pension rights in the EU (OJ C 48, 21.2.2002).

(5) Opinion on Economic growth, taxation and sustainability of pension rights in the EU (OJ C 48, 21.2.2002).

(6) Under the Swedish scheme, unemployment, sickness and study allowances all confer pension entitlement. The relevant component of the state study grant corresponds to approximately 20 % of average earnings. As regards first-tier pension rights, the Irish scheme traditionally combined actual contributions with those credited to beneficiaries as a result of their compulsory social security contributions.

(7) Opinion on Economic growth, taxation and sustainability of pension rights in the EU (OJ C 48, 21.2.2002).

(8) Opinions on: "Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee: Supporting national strategies for safe and sustainable pensions through an integrated approach" (OJ C 48, 21.2.2002); "Economic growth, taxation and sustainability of pension rights in the EU" (OJ C 48, 21.2.2002); and "Older workers" (OJ C 14, 16.1.2001).

(9) See especially the Commission Communication on "Increasing labour force participation and promoting active aging" - COM(2002) 9 final.

(10) It is well known that early retirements have had, and still have, a considerable impact on the budgets of public pension schemes, above all because, in the years when the prospect of completing the internal market encouraged businesses to restructure, more jobs were abolished than were created by market expectations, and between 15 and 20 million early retirements took place in the EU during that period.

(11) Information report on the Demographic situation in the EU and future prospects - CES 930/1999 fin.

(12) Information report on the "Demographic situation in the EU and future prospects" - CES 930/1999 fin; and Opinion on the Communication from the Commission: A concerted strategy for modernising social protection - OJ C 117, 26.4.2000.

(13) On this subject, see the criteria adopted in the Merrill Lynch study to assess the sustainability of pension reforms in Europe.

(14) OJ C 48, 21.2.2002.

(15) Reforms of the pension systems in the EU: an analysis of the policy options, Chapter 5.

(16) The exception is the Community framework to facilitate the transferability of second- and third-tier pensions (see point 2.5.5).