Opinion of the Economic and Social Committee on "Economic Growth, Taxation and Sustainability of Pension Rights in the EU"
Date: 2001-11-29
Institutions: European Economic and Social Committee
Subjects: European Union, demography, elderly person, financing, pension scheme, social policy

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Official Journal of the European Communities

C 48/89

Opinion of the Economic and Social Committee on ‘Economic Growth, Taxation and Sustaina-
bility of Pension Rights in the EU’

(2002/C 48/22)

At its plenary session on 29 March 2001 the Economic and Social Committee decided, under Rule 23(3)
of its Rules of Procedure, to draw up an opinion on ‘Economic Growth, Taxation and Sustainability of
Pension Rights in the EU’.

In accordance with Rules 11(4) and 19(1) of its Rules of Procedure the Committee set up a sub-committee
to prepare its work on this subject.

The subcommittee ‘Economic Growth, Taxation and Sustainability of Pension Rights in the EU’, which
was responsible for the preparatory work, adopted its opinion on 19 October 2001. The rapporteur was
Mr Byrne and the co-rapporteur was Mr Van Dijk.

At its 386th plenary session (meeting of 29 November 2001) the Economic and Social Committee
adopted the following opinion by 90 votes to two with 2 abstentions.

1.

Introduction

The provision of adequate pensions to retired people
1.1.
is a key element in the overall structure of European social
protection whereby pensioners enjoy a degree of income
security.

1.2.
In recent years studies undertaken by the Commission
and others have drawn attention to the changing demographic
structures in the EU and the potential risk this may pose to the
financial sustainability of pension systems. The Commission
for example has stated that ‘The combination of the three
pillars making up pension systems offer an unprecedented
degree of prosperity and economic independence to older
people in Europe. The prospect of population ageing and the
retirement of the “baby boomer” generation represents a major
challenge to this historic achievement. Population ageing will
be on such a scale that, in the absence of appropriate reforms,
it risks undermining the European social model as well as
economic growth and stability in the European Union (1)’.

1.3.
In addition to the demographic issues attention must
also be given to the need to adapt pension systems to changing
needs of society and individuals.

The ESC regards the general sustainability of pensions
1.4.
as a crucial
issue and has therefore undertaken this own-
initiative opinion to examine this issue and the importance of
economic growth and taxation to achieving a solution.

The Committee recognises the large amount of work
1.5.
done by the Commission in recent years to focus attention
on this critical
issue. The latest Communication from the
Commission ‘Supporting national strategies for safe and
sustainable pensions through an integrated approach’ (2) builds
on the work of the Economic Policy Committee and the Social
Protection Committee.

1.5.1.
The Communication proposes the open co-ordi-
nation method should be used which, without departing from
the subsidiarity principle, will establish common objectives
and commonly agreed indicators for the Member States. The
objectives are grouped under three broad headings:

— adequacy of pensions;

— financial sustainability of public and private pension

schemes; and

— modernisation of pension schemes in response to chang-

ing needs of society and individuals.

1.5.2.
Although this opinion was initiated before the Com-
mission’s Communication (3) was published the Committee
believes that this opinion addresses the pension issues raised
in the Communication in sufficient detail
to enable the
Committee to endorse its objectives subject to the comments

(1) COM(2000) 622 final.

(2) COM(2001) 362 final.
(3) SOC/085 — Supporting national strategies for safe and sustainable
pensions through an integrated approach — COM(2001) 362
final.

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contained in the Committee’s opinion referred to in the next
paragraph.

2. The demographic issue

1.5.3.
The Committee is drawing up an opinion on the
Communication which will focus on certain aspects of consist-
ency between the policies involved and the methods for
developing cooperation in this area. Consequently the two
opinions are complementary and together make up the
Committee’s contribution to the ongoing debate.

The demographic studies point to a clear conclusion
2.1.
that the number of older people will rise sharply in relation to
the number of people of working age. In its Communication
dated 3 July 2001 the Commission states ‘The old age
dependency ratio will start to rise rapidly in the next decade
and double by the year 2050 compared to today’ (1) (see
Table 1).

(1) COM(2001) 362 final.

Table 1: Baseline projections of old age dependency ratios in EU Member States (65+ over people aged

20-64 years)

%

2000

2010

2020

2030

2040

2050

B

DK

D

GR

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU–15

29,5

25,5

28,0

30,2

28,7

28,5

20,3

30,7

24,8

23,1

26,3

26,7

25,9

30,9

27,8

28,3

31,1

29,6

34,1

33,6

30,7

29,5

20,5

35,5

27,6

26,2

30,1

28,5

29,7

33,8

28,5

31,4

38,0

35,7

38,6

38,0

35,2

38,1

26,2

42,1

33,0

34,7

34,5

32,2

41,4

39,8

33,9

37,3

48,8

42,0

50,3

44,4

44,7

46,4

32,1

52,9

42,5

44,2

47,0

37,2

49,5

45,4

43,1

46,8

53,5

47,0

57,0

54,7

59,8

52,1

38,4

67,8

47,2

50,1

57,0

46,3

49,7

48,9

49,1

55,0

52,0

43,7

56,1

61,6

68,7

53,2

46,6

69,7

43,5

46,9

57,7

50,9

50,6

48,5

48,5

55,9

2.2.
This arises firstly from the improved health and living
conditions which EU citizens enjoy which is leading to an
increase in average life expectancy. Indeed the Commission
points out that all previous forecasts have tended to underesti-
mate the rise in average life expectancy so that current forecasts
are more likely to be exceeded than under-achieved.

could have a positive effect. Others dispute this: the Com-
mission, for example, considers that even though immigration
is likely to increase, the dependency ratio will not improve.

Secondly there has been a significant

in the
2.3.
fertility rate, which in some Member States is now below the
replacement rate.

fall

2.4.
In the debate about the affordability of pensions,
various people and bodies are pointing out that immigration

In this context, the ESC refers to its previous opinion on
immigration policy.
the aim is to adopt a pro-active
immigration policy, it is necessary to develop an effective
policy of social integration, so that the EU and immigrants
benefit fully from the situation.

If

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2.5.
The overall position therefore is that the old age
dependency ratio will rise significantly over the next 30 to
40 years. This will have implications for the financing of
pension systems.

2.6.
The Commission has given some figures to indicate
the potential scale of the problem. Without reforms the level
of expenditure on state pension schemes could exceed 15 % of

GDP in 2030 a rate that could not sustained within the current
goal of sustainable public finances (see Table 2). Currently
pension expenditure averages 12 % of GDP in the EU. It
should be noted however that these average figures disguise
considerable variation between Member States. The Committee
regards as of particular significance the rate at which the
percentage may peak in the early years in individual Member
States.

Table 2: Projections of public pension expenditure — Current policy assumptions (1)

(as a percentage of GDP, before tax)

2000

2005

2010

2020

2030

2040

2050

9,3

8,7

9,0

10,4

12,5

13,0

12,6

10,2

11,3

12,7

14,0

14,7

13,9

13,2

10,3

9,8

9,5

10,6

13,2

14,4

14,6

Maximum
growth

3,7

4,5

4,3

12,6

12,4

12,6

15,4

19,6

23,8

24,8

12,2

9,4

9,2

9,3

10,2

12,9

16,3

17,7

12,1

12,2

13,1

15,0

16,0

15,8

N.A.

4,6

4,5

5,0

6,7

7,6

8,3

9,0

14,2

14,1

14,3

14,9

15,9

15,7

13,9

Belgium

Denmark (2)

Germany (3)

Greece (4)

Spain

France

Ireland

Italy

Luxembourg (5)

Netherlands (6)

7,4

7,9

7,4

8,3

7,5

9,1

8,2

9,2

9,5

9,3

11,1

13,1

14,1

13,6

Austria

Portugal

Finland (3)

Sweden

UK (7)

14,5

14,4

14,8

15,7

17,6

17,0

15,1

9,8

10,8

12,0

14,4

16,0

15,8

14,2

11,3

10,9

11,6

14,0

15,7

16,0

16,0

9,0

5,1

8,8

4,9

9,2

4,7

10,2

10,7

10,7

10,0

4,4

4,7

4,4

3,9

Source: EPC.
(1) With the exception however of Spain, which used a higher decline in its unemployment rate (4 % in the long-term), and Portugal

and Denmark which used changes in productivity of 3 % and 1,5 % respectively.

(2) For Denmark, net of the supplementary semi-funded scheme (ATP), the increase from 2000 to the peak year is only 3,1 % of

GDP.

(3) Figures refer to the statutory pension scheme excluding the civil servants’ scheme ‘Beamtenversorgung’.
(4) Provisional data.
(5) Figures refer to the public pension scheme for the private sector and do not include the public pension schemes for civil servants

and assimilated employees.

(6) For the Netherlands the second tier is quite well developed. Such characteristics have a direct positive effect on the public
pension scheme by reducing the burden of ageing populations on first pillar pensions. However, there is also an important
indirect implication: taxes on future pension benefits (which are drawn from private funds) are expected to be quite high and
may partially counterbalance the rise in public pension benefits.

(7) The figures for the UK do not reflect the substantial increase in pensions announced recently. This change will increase the share
of GDP devoted to public pension expenditure. Social assistance for pensioners has also been substantially increased and will be
modified to reward private provision. The UK also has well-developed second and third pillar schemes. Taxes on future pension
benefits drawn from private funds will partially counterbalance the rise in public pension expenditure.

8,3

3,9

4,4

1,7

2,1

6,2

3,1

6,2

4,7

1,7

0,0

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2.7.
The Committee believes that these forecasts, which
arise from the growing imbalance between contributors and
beneficiaries, must be addressed to ensure the sustainability of
pension systems both for PAYG and funded schemes.

2.8.
In fact the Social Protection Committee has expressed
the view that issue of sustainable pensions requires meeting a
triple challenge:

— to safeguard the capacity of pension systems to meet
their social aims of providing safe and adequate incomes
to retired persons and their dependants and, ensuring in
combination with health and long term care systems,
decent living conditions for all elderly persons;

— to maintain the financial stability of pension systems, so
that the future impact of ageing on public finances does
not jeopardise budgetary stability or lead to an unfair
sharing of resources between the generations; and

— to enhance the ability of pension systems to respond to
the changing needs of society and individuals, thereby
contributing to enhanced labour market flexibility, equal
opportunities for men and women with regard to employ-
ment and social protection and a better adaptation of
pension systems to individual needs.

the quality of the services provided. The Committee therefore
also emphasises the need to examine the various components
of health-care expenditure, with particular reference to expen-
diture on drugs, as the Committee has requested in a number
of its opinions. The Committee has also expressed the view in
a recent opinion that
‘the use of supplementary health
insurance can and should be hailed as fundamentally beneficial’
(SOC/040 — Supplementary health insurance) (1).

2.10.
The Committee believes that provided there is con-
certed and co-ordinated action by Member States there is
no need for undue pessimism regarding the ability of the
Community to achieve a sustainable solution to the demo-
graphic issues. It must also be borne in mind that the problem
is both a financial and a social issue. As the Committee has
already argued, investment in the social field is beneficial to
economic development as a whole. The Economic Policy
Committee’s report is significant here, as it calls for a reduction
in debt to free up resources which can then be invested in
social policies.

3. The pension options

The Commission categorises the provision of pensions

3.1.
under three pillars in the EU:

— Pillar 1: The statutory pensions systems — (which are
generally financed on the Pay As You Go principle);

The Committee suggests that in the context of equal
2.8.1.
opportunities and meeting individual needs special attention
should be given to atypical workers.

— Pillar 2: Funded occupational pension schemes — (which

are generally tied to the employer or the sector);

2.9.
In considering the financing implications the ESC
agrees with the Social Protection Committee that the corre-
lation between pension and cost of health care systems must
not be overlooked. A higher proportion of older people in the
general population will not only lead to higher pension costs
but to higher health care costs as well including the impact of
both physical disability and senile diseases. Health care cur-
rently averages 7 % of GDP in the EU.

— Pillar 3: Personal pension arrangements — (which are

generally provided by life assurance companies);

Pillars 2 and 3 are traditionally known as supplementary
pensions.

3.2.
The advantages and disadvantages of each pillar were
discussed in the Commission’s Green Paper ‘Supplementary
Pensions in the Single Market’ issued in June 1997 (2).

2.9.1.
The Commission has indicated that the Economic
Policy Committee is currently assessing the effect of ageing on
health care costs which will provide more reliable estimates of
future costs. The Committee very much welcomes this initiat-
ive while stressing that an approach based exclusively on
financial sustainability could be insufficient and thus jeopardise

(1) OJ C 204, 18.7.2000, p. 51.
(2) COM(97) 283 final.

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3.3.
The Pillar 1 schemes are by far the dominant method
by which pensions are provided across the EU as a whole.
However in three Member States, the Netherlands, UK and
Ireland, the Pillar 2 and 3 schemes are a major component of
pensions provision.

3.4.
The Commission has clearly indicated that the level of
dependency on each pillar is a matter for individual Member
States. The Committee supports this view and believes the
crucial need is for each Member State to address the issue in
the manner most appropriate to its circumstances and tra-
ditions. The aim must be to strike a balance that guarantees
the achievement of social objectives and financial sustaina-
bility. This will only be possible if the reforms are agreed
between governments and the social partners.

3.5.
The Committee welcomes the fact that Member States
have started this process and that Member States are reporting
to the Commission that they do not expect radical transform-
ations of their pension systems and in particular that it does
not involve an abandonment of the basic principles and social
aims.

expectation that enhanced economic growth will lead to higher
levels of employment and higher incomes.

4.2.2.
The demographic projections in their raw state relate
the number of persons of working age to those of retirement
age. It is incontrovertible that this ratio is going to change
towards a higher ratio of pensioners.

The more important ratio however is between those
4.2.3.
who are economically active and those receiving pensions.
Thus the relatively low current level of labour market partici-
pation in the EU (although there is a fair degree of variation
if projected into the future would
across Member States)
reinforce the gloomy prognostications regarding the sustaina-
bility of pensions.

4.2.4.
If however participation rates could be raised it
would reduce the impact of the demographic problem — the
greater the improvement in employment rates the greater the
pensions impact. A sustained period of high economic growth
would however be required to achieve this.

3.6.
The Committee believes the setting of common objec-
tives and the use of commonly agreed indicators — combined
with full use of the open co-ordination method — will
contribute to building a consensus between Member States on
necessary reforms and provide the opportunity to share
experience in this important area. The methods used to achieve
these objectives will be a matter for each Member State under
the subsidiarity principle.

In the following point, we explore in more detail the
4.2.5.
increase in labour market participation. The ESC would note
here that sustainable dynamic economic growth is necessary
for employment to increase. Important factors that can affect
this are competitiveness, EU economic performance and
employment policy.

4.

Improving the sustainability of pensions

4.1.
Against this background the key imperative is to ensure
the payment of future pensions irrespective of the method of
financing.

A coherent and consistent national and European approach is
also necessary to increase labour market participation, as is
envisaged by the Luxembourg process. An important factor
here is that complementary measures, such as childcare and
career break options, increase possibilities for combining work
and family.

4.2.

Impact of economic growth

Greater economic growth is not an end in itself but
4.2.1.
a means by which the resources are generated to be used to
improve living standards of all citizens. Thus the level of
affordable expenditure including pensions cannot be totally
insulated from general economic conditions. The rate of
economic growth has a potentially significant influence on the
sustainability of pensions. This arises particularly via the

4.3.

Increase in labour market participation rates

4.3.1.
A significant increase in labour market participation
rates is one of the most powerful actions, which would
improve the sustainability of pensions.

4.3.2.
Although there is considerable variation between
Member States as noted above average labour market partici-
pation rates in the EU are low by comparison with the US and
Japan.

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4.3.3.
However it must be acknowledged that this factor
has been known for many years but progress towards increas-
ing the rate has been modest.

particularly for disabled people to enable them to enter the
workforce as many would wish to do.

4.3.4.
The Lisbon Council set a target of 70 % against the
current 63 % to be achieved by 2010. It set a separate target
for women of ‘over 60 %’ as employment rates among women
have traditionally lagged behind those for men.

In Stockholm, European heads of government stepped up
these objectives: by 2005 participation must be 67 %, and
57 % for women. In addition, an objective of 50 % was
introduced for older workers.

4.3.5. While the Committee supports the concept of
improving participation rates it believes based on past experi-
ence that it represents a major challenge to the EU Member
States. Obviously a key factor would be a sustained rate of
economic growth in excess of 3 % p.a. but despite a good
performance in 2000 this will not be achieved in the next few
years . However it is hoped that in the medium term prospects
for growth and employment may improve. The Committee
believes that a successful combination of favourable macro
economic conditions and sustained reform measures is needed
to promote growth and employment.

4.3.6.
The Committee considers that while there are occu-
pations where the possibility of early retirement is justified it
agrees with the Social Protection Committee that the economic
and social needs which caused early retirement to be regarded
as acceptable are now changing. Thus the practice whereby
older workers retired early although sometimes enabling
younger workers to gain jobs or be retained in employment
has been a factor in producing lower participation rates and
increased dependency ratios. The Committee suggests that the
whole subject of encouraging greater participation rates by
older workers requires a special study to develop appropriate
strategies to achieve this.

4.3.7.
The Committee supports the aim of increasing the
female labour market participation rates but the Committee
points out that this will require the provision of stronger
support in relation to child-care facilities. In the opinion of the
Committee it is necessary to promote the reconciliation of
family and career needs to avoid a further fall in fertility rates.
In fact an increase in fertility rates would be beneficial to the
demographic position. The Committee has dealt with fertility
rates in more detail in its Information Report on The Demo-
graphic situation in the EU and future prospects (1).

4.3.8.
The Committee supports the view of the Social
Protection Committee that the new target for increasing the
participation rate of older men and women is particularly
important. The Committee also believes that appropriate
instruments are required to ensure training needs and flexible
working arrangements are provided for older workers and

(1) SOC/017 — Information Report ‘The demographic situation in

the EU and future prospects’ — CES 930/99 fin.

The Committee emphasises

4.3.9.
the importance of
achieving these labour market participation targets because of
the benefits which would result for pensions but stresses that
other measures should be pursued in parallel to ensure success
in the goal of achieving sustainability of pensions.

4.4. Reducing public debt

4.4.1.
The Committee acknowledges that reduction of
public debt and therefore debt servicing costs will strengthen
the financial position of Member States. This will allow them
more scope to support the financing costs of future pensions,
albeit that the impact will vary as between Member States.

4.4.2.
The Stability and Growth Pact to which all Member
States must adhere including the reduction of public debt and
the generation of surpluses will therefore increase the capacity
to support pension schemes in the longer term. This would
for example facilitate the creation of Reserve Funds (see
paragraph 7.5).

4.4.3.
The Committee also draws attention to the import-
ance of improving tax collection and in particular the elimin-
ation of tax evasion as a contributor to Member States’
financial positions.

4.5.

Projections of public pension expenditure under the Lisbon
scenario

The Economic Policy Committee has developed a
4.5.1.
scenario on the basis of the Lisbon targets and asked Member
States to make another projection of expenditure on pensions
in accordance with that scenario (see Table 3). As shown in
the Table the difference in the maximum gap in debt growth
as a percentage of GDP varies from 0 % to 2 % with the
exception of Greece where it reaches 4,2 %.

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Table 3: Projections of public pension expenditure — Lisbon scenario (1)

(as a percentage of GDP, before tax)

2000

2005

2010

2020

2030

2040

2050

9,2

10,2

10,3

12,6

9,4

7,9

7,6

10,7

11,8

9,8

9,5

8,7

12,8

10,5

12,1

11,9

14

9,2

9,2

9,8

12,1

11,3

11,7

13,6

4,6

4,6

5,5

6,7

10,3

13,0

12,2

16,8

12,0

14,7

7,4

10,8

12,1

12,6

20,2

14,9

14,8

8,3

10,4

11,3

12,3

20,6

15,8

N.A.

8,2

14,2

13,9

13,9

14,0

14,6

14,5

14,1

7,4

7,9

14,5

9,4

11,3

9,0

5,1

7,4

8,3

14,4

10,1

10,9

8,6

4,8

7,5

9,2

14,4

11,0

11,6

8,7

4,4

8,2

11,5

14,7

12,7

13,6

9,4

4,0

9,2

13,3

15,8

13,5

15,1

9,6

4,0

9,5

13,9

15,2

12,7

15,4

9,4

3,8

9,3

13,4

13,5

11,0

15,6

8,9

3,4

Maximum growth

Lisbon

Current
policy

1,6

3,7

2,8 (3)

4,5 (4)

2,3

8

6,4

2,7

3,7

0,4

2,1

6,0

1,3

4,1

4,3

0,6

0,0

4,3

12,2

8,3

3,9

4,4

1,7

2,1

6,2

3,1

6,2

4,7

1,7

0,0

Belgium (2)

Denmark

Germany

Greece (5)

Spain

France

Ireland

Italy

Luxembourg (6)

Netherlands (7)

Austria

Portugal

Finland

Sweden

UK (8)

Source: EPC.
(1) For the Lisbon scenario, France assumed unemployment rates and active employment rates below the ones described above. The
active employment rate is lower because no allowance is made for changes in pension eligibility requirements to increase labour
force participation by the elderly. France’s assumptions provide a more optimistic scenario in the medium term (around 2010-
2020) whereas the opposite occurs in the longer term. Italy’s active employment rates are lower than those described in the
general methodology, whereas Spain’s productivity growth is slightly higher after 2035. Portugal used the mean-variant
population scenario rather than the high-variant scenario.

(2) Belgium assumes an employment rate of 76,5 % taking into account tighter conditions for early retirement and long-term
unemployment schemes, the increase in the participation rate of women (except for those below the age of 30) and the increase
in the effective retirement age. An increase in the employment rate of younger people was not assumed as this would imply
lower attendance rates in education.

(3) For Denmark, net of the supplementary semi-funded scheme (ATP), the increase from 2000 to the peak year is only 1,6 % of

GDP.

(4) For Denmark, net of the supplementary semi-funded scheme (ATP), the increase from 2000 to the peak year is only 3,1 % of

GDP.

(5) Provisional data.
(6) In the case of Luxembourg the current scenario is the same as the Lisbon scenario: this scenario assumes an unconstrained
growth of real GDP of 4 % per year over the entire projection period which corresponds to the average growth of the last
40 years. Figures refer to the public pension scheme for the private sector and do not include the public pension schemes for
civil servants and assimilated employees.

(7) For the Netherlands the second tier is quite well developed. Such characteristics have a direct positive effect on the public
pension scheme by reducing the burden of ageing populations on first tier pensions. However, there is also an important indirect
implication: taxes on future pension benefits (which are drawn from the private funds) are expected to be quite high and may
partially counterbalance the rise in public pension benefits.

(8) The figures for the UK do not reflect the substantial increase in pensions announced recently. This change will increase the share
of GDP devoted to public pension expenditure. Social assistance for pensioners has also been substantially increased and will be
modified to reward private provision. The UK also has well-developed second and third pillar schemes. Taxes on future pension
benefits drawn from private funds will partially counterbalance the rise in public pension expenditure.

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4.5.2.
optimistic assumptions including:

It should be noted this scenario is based on quite

This also seems entirely in keeping with the concept of
intergenerational solidarity.

— annual GDP growth at or above 3 % on average in the

period to 2007;

— male and female participation rates converge to 83 %
by 2045 (in most countries this would require later
retirement);

— male and female unemployment rates converge to 4 % by

2045;

5.2.
The Committee supports the view expressed by the
Social Protection Committee that an unfair sharing of resources
between the generations must be avoided. This also points to
the need for early action to avoid burdening the coming
generations unduly.

5.3.

Possible action fall under two broad headings:

(a)

improve the sustainability of PAYG schemes,

— projections for the working age population are taken
from the ‘high scenario’ provided by EUROSTAT, and

(b)

supplement existing pension arrangements by the intro-
duction of a larger element of pre-funded arrangements
(Pillars 2 and 3).

— productivity levels and growth converge across the EU to
match the US by 2050. US productivity growth for the
first half of the current century is assumed at 1 % against
the current 2,3 %.

These headings are not mutually exclusive.

The Committee acknowledges that this very broadly
4.5.3.
based scenario is a projection of the future rather than a
forecast. Nevertheless it accepts the conclusion of the Econ-
omic Policy Committee that while having the potential to
make a major contribution to addressing the financial impact
of ageing it will not by itself resolve the problem of financing
long-term pensions. However, the Committee would empha-
sise that, given the current deterioration in the global economic
environment in terms of cyclical conditions and jobs, the
economic and employment policy scenario set out above
must, with justification, be considered optimistic. Hence, the
Committee feels there is an urgent need for a better-coordi-
nated European economic and employment strategy — involv-
ing all players — in order to boost growth and jobs.

5. Actions to improve sustainability

5.1.
The extent to which the EU population will continue
to age in future will have a significant effect on the sustaina-
bility of pensions. The current evidence is that increased
longevity will be progressive so that it is essential to initiate
action now to anticipate the extra costs that will arise. The EPC
have already acknowledged that even in their optimistic
scenario the outcome would not fully cover the financial
impact of ageing and recent global developments heighten the
risk of underachievement. Action now will prevent the costs
of sustaining pension payments becoming insupportable since
the additional costs can be spread over an extended period.

5.4.

Improve the sustainability of PAYG scheme

In addition to the items already dealt with in Section 4 this
could include the following depending on the circumstances
of each Member State:

(a)

Increasing participation rates for older workers (see 7.3).

(b) Assess the possibility of increasing contribution rates (see

7.4).

(c) Creating reserve funds to cushion the ageing effect until
age cohorts realign to a lower age dependency level (see
7.5).

(d) Modifying the qualification criteria for future pensions

(see 7.6).

(e) Reviewing the structure of third level education which in
some Member States unnecessarily delays entry into
labour market (see 7.7).

(f)

Reducing public debt to release resources to sustain the
pension system (see 4.4).

(g) A combination of the above.

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5.5.
In the context of the single market the Commission
has been taking steps to enable supplementary pension
schemes to be introduced without specifically promoting their
development. The Commission via its recent draft directive
has also sought to improve the protection of pension scheme
members by more rigorous control procedures, the provision
of relevant
information to improve transparency and an
investment regime designed to deliver improved returns within
controlled risk.

5.6. Whilst a transition even partly from PAYG to a funded
system might be considered attractive to some States and has
been introduced for example in both Sweden and Italy, the
social consequences have to be carefully considered.

5.7.
This is because payments would have to be made to
two systems simultaneously. It would be unacceptable that
current pensioner’s income be put at risk by diversion of
contributions away from PAYG systems into the funding of
future pensions. Nevertheless some level of pre-funding is
feasible as demonstrated by Sweden and would make a
worthwhile contribution to easing future costs.

The main attraction of funded schemes remains that
5.8.
they are not dependent on a future relationship between
contributors and beneficiaries, which by definition cannot be
accurately predicted. Funds should be invested in a well
the placing of
diversified portfolio to minimise risk but
restrictive quantitative limits should be avoided. The Com-
mittee has produced an opinion on the Commission proposal
for a directive covering the activities of
second pillar
schemes (1).

5.9.
However given the relative importance of the State
schemes the greatest effort needs to be concentrated on steps
to maintain their sustainability.

6. Taxation

6.1.
The Committee suggests that Member States can use
taxation to encourage action on pensions which they wish to
promote.

6.1.1.
Tax relief on contributions can be used to encourage
individual financial provisions for personal pensions or other
forms of saving for retirement provision e.g. to supplement
the State system.

Tax relief can also be used to encourage employers
6.1.2.
to introduce funded pension arrangements for their employees.
The development of supplementary pension schemes at com-

pany or category level, on the basis of agreements included in
collective contracts, would be useful.

6.1.3.
Taxation arrangements for funded pension schemes
are based on three different concepts among EU Member
States:

(a)

(b)

EET i.e. contributions exempt, investment income exempt
and pensions taxed.

ETT i.e. contributions exempt, investment income taxed
and pensions taxed.

(c) TEE i.e. contributions taxed, investment income exempt

and pensions exempt.

The concept that if income is deferred (through pension
contributions) then tax should also be deferred is logical. Also
given the larger share of GDP accruing to pensioners in the
future the total exemption of pensions from tax is likely to be
difficult to sustain.

From the point of view of the single market it is
6.2.
important that speedy progress is made to deal with the
problems caused by cross-border pension arrangements. In
this connection the recent Communication on Taxation from
the Commission is welcomed and has already been the subject
of a separate opinion from the Committee (2).

7. General comments

7.1.
Ensuring the payment of pensions to a steadily ageing
population is one of the main challenges facing the EU. EU
citizens must be able to expect that the necessary efforts will
be made.

The Committee’s main concern remains securing the
7.2.
income of future pensioners. Pensioners are a vulnerable sector
of society and their interests must be protected. The Committee
therefore strongly supports the view that appropriate action
should be taken to achieve this while respecting the need to
maintain intergenerational solidarity.

7.3.

Increasing participation rates for older workers

7.3.1.
An increase in labour-market participation rates is
very important for the financial sustainability of pensions. As
pointed out earlier, this rate is substantially lower for workers
between 55 and 64 than for other age groups. This is largely
due to arrangements enabling older workers to retire early.

(1) OJ C 155, 29.5.2001, p. 26.

(2) ECO/071 — The elimination of tax obstacles to the cross-border
provision of occupational pensions — COM(2001) 214 final.

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These arrangements were introduced so that older workers
could give way to younger workers in a socially responsible
manner. This was necessitated by high unemployment.

encouraged if there is cohesion in the way flexibility is applied
under each of the pillars in each Member State. Later retirement
would have economic benefits while contributing to better
and more secure pensions.

7.3.2.
Views have changed since then. The labour-market
situation in many Member States has changed. The financial
consequences of early retirement arrangements are also weigh-
ing ever more heavily.

7.3.3.
In previous opinions the ESC has already argued for
a higher participation rate among older workers. Various
measures were proposed in the opinion on older workers:

— an age-aware personnel policy;

— tax incentives for employers to keep on older workers;

— part-time pensions;

— tax incentives for employees to stay in work longer;

— flexible pension arrangements.

If the participation rate of older workers is to rise,
7.3.4.
the Committee sees no reason to harmonise the retirement age
for the time being. At present that is a national matter and
should remain so.

Finally, the Committee sees little point in a debate on raising
the retirement age until the participation rate of older workers
has been increased substantially, as the most
important
indicator is the effective retirement age and not the legal
retirement age.

7.3.5.
The Committee recommends therefore that flexibility
be created so that those in good health and wishing to continue
working are provided with the opportunity and financial
incentive to do so in either a full-time capacity or on a reduced
basis. The possibility for a worker, after an appropriate age, to
reduce working hours progressively would cater for reduced
capacity and at the same time allow the worker to remain
active on a salary sufficient for his/her needs and defer the
drawing of actual pension.

7.3.6.
This flexibility would have to exist in both State and
private sector schemes in parallel whereas currently the rules
relating to retirement flexibility within a Member State often
differ between the pillars. Later retirement patterns may be

7.4. Assessing the possibility of increasing contribution rates

7.4.1.
The Committee accepts that increased contribution
rates from both employers and employees could be used to
improve the sustainability of pensions.

7.4.2.
consequences of increasing contributions:

The Committee is concerned however at the possible

(a)

(b)

It increases the cost of employment and is thus potentially
in conflict with the aim of increasing labour market
participation rates.

It is potentially inequitable in that workers would be
asked to pay considerably more than the economic cost
of the benefits they would personally receive in the future
as a result of the imbalance between contributors and
beneficiaries in the middle years of this century.

(c)

It could reduce the EU’s ability to compete for inter-
nationally mobile inward investment.

(d)

It could encourage a ‘brain drain’ from the EU of highly
skilled people.

7.4.3.
The Committee believes therefore that any proposal
to increase contributions should be assessed against the likely
impact on employment.

7.5. Cushioning the increase in pension cost by the use of Reserve

Funds

7.5.1.
The Committee suggests that one way of reinforcing
the sustainability of Pillar 1 schemes is, where possible, to set
aside funds now which can be drawn on post 2020 to off-set
the increase in cost.

Ireland is one of a number of Member States that
7.5.2.
have introduced this method. In 1998 the Irish Government
announced revised pension arrangements. This included the
establishment of the National Pension Reserve Fund to which
the Government is committed to contributing 1 % of GDP
annually. In addition the proceeds of recent privatisations have
been added to the fund. The fund will be invested under the

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supervision of an independent Board and used eventually to
reduce the burden of funding State pension costs post 2025
and is ‘ring fenced’ so that future Governments cannot divert
the funds to other uses.

schemes to top up their pensions. Whilst there is virtually
universal coverage in the Netherlands for a variety of reasons
including reluctance of employers to establish a scheme,
workers in transient jobs etc. the coverage of workers in such
schemes in the latter two countries is too low.

7.5.3.
The Committee considers that ‘ring fencing’ is an
important safeguard which will protect pensioners by ensuring
that these funds cannot be used by a future administration for
other purposes.

7.5.4.
This method is not a move to pre-funding per se but
a means of securing a more equitable balance between the
generations.

7.6.
An option for improving the sustainability of pensions
is to modify the qualification criteria for future pensions. The
Committee is aware that a number of Member States have
made this type of adjustment to the pension entitlement rules.
The Committee does not see this as an area where general
recommendations are appropriate firstly because of the subsid-
iarity principle and secondly because any such action must be
appropriate to the particular circumstances of the Member
State concerned and desirably discussed with the social
partners.

7.7.
The Committee is aware that in some Member States
the structure of third level education delays unnecessarily
the entry of graduates into the labour market. The new
demographic situation makes it desirable that this be reviewed.
However the Committee stresses that this proposal
is not
designed to reduce the level of education which, given
the Lisbon Council aim of becoming the most competitive
knowledge-based economy should, if anything, be enhanced.

7.8.4.
This issue has been addressed recently in both the
UK and Ireland. In the UK the Government has introduced
Stakeholder pensions. Under this system the Government has
established a framework in which pension providers can offer
Stakeholder pensions. Employers must co-operate with the
arrangement by
implementing payroll deductions but
employer contributions remain voluntary. In addition costs
are capped under the legislation to ensure the maximum
amount possible actually is invested for the worker’s benefit.
In effect the scheme delivers a portable savings plan for use in
providing an eventual pension.

7.8.5.
The Committee suggests that the use of this type of
scheme might be useful for other Member States to consider
to supplement their State schemes.

7.9. Adapting pensions to a changing society

The Committee agrees with the Social Protection
7.9.1.
Committee that attention needs to be directed at adapting
pension systems to changing employment patterns and to the
need to ensure gender equality.

7.8.

Supplement state pensions with funded top-up schemes

7.9.2.
Important considerations are involved and the Com-
mittee believes that there is much to be gained by sharing the
experience between Member States.

7.8.1. Many Member States consider that the promotion of
supplementary pension schemes can make a contribution to
the sustainability of their overall pension systems. Any such
funds should be invested in a well diversified portfolio to
minimise risk but the imposition of restrictive quantitative
limits should be avoided.

7.8.2. Minimum regulatory standards to ensure the security
and sustainability of funded supplementary schemes have
already been proposed by the Commission.

7.8.3.
Supplementary pension schemes are particularly
used in three Member States — the Netherlands, UK and
Ireland. In these countries the State pension (PAYG) is set at a
relatively low level and many workers rely on supplementary

7.9.3.
A desired long term goal would be the individualis-
ation of pensions i.e. that pensions would be an entitlement of
the individual not as in some cases at present derived from
dependency on another person. This would mainly affect
women. However because of
their employment patterns
e.g. periods out of work for child rearing, care would have to
be taken not to leave them with inadequate pensions. Some
Member States have successfully addressed this problem.

7.9.4.
There are a significant number of self-employed
business people in the community who often do not make
adequate pension provision for themselves and their depend-
ants and may not qualify for adequate provision under the first
pillar. Attention needs to be directed to ensuring this category
are adequately covered.

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7.9.5.
The Committee notes that some Member States
support their elderly people in other ways in addition to the
provision of a pension. This includes a variety of arrangements,
for example, more favourable taxation, free electricity, free or
reduced fares for public transport, tax relief for rent. The
Committee believes that this type of support is particularly
effective in relieving poverty among older citizens.

7.10.

Issues required to be addressed in supplementary schemes

One of the major problems with pension schemes
7.10.1.
in some countries is the long vesting period (up to 10 years)
before a worker becomes entitled to his pension. This is clearly
in conflict with the view that pensions are forms of deferred
pay i.e. pension rights are earned each year in same way as
pay. The Committee believes that long vesting periods should
be abolished.

7.10.2.
The demographic factors, which effect PAYG
schemes, are also important for funded schemes. The main
consideration is that actuaries ought to be making timely
adjustments to contribution rates to ensure adequate technical
reserves are being created to match longer life expectancies.

The Committee has already welcomed and com-
7.10.3.
mented on the proposed Directive for Occupational Pension
schemes which seeks to facilitate cross-border operation of
Pillar 2 schemes (1).

7.10.4.
The above Directive does not deal with the essential
issue of taxation but the Commission has dealt with it in a
recent Communication on which the ESC has already drawn
up an opinion (2).

7.11.

Enlargement

7.11.1.
The Committee believes that the sustainability of
pensions in the applicant countries is also a major issue in
terms both for the applicant
both economic and social

(1) OJ C 155, 29.5.2001, p. 26.
(2) ECO/071 — The elimination of tax obstacles to cross-border
provision of occupational pensions — COM(2001) 214 final.

countries themselves and the Union as a whole. Applicant
countries should be encouraged to assess the long-term
viability of their pension arrangements and to initiate action
to improve sustainability where necessary.

8. Conclusions

8.1.
The Committee attaches the highest priority to the
protection of pensioners both present and future to ensure
that they enjoy a decent standard of living in retirement. The
Committee commends the Commission therefore for directing
the spotlight on this issue in the context of demographic and
social change.

8.2.
The Committee is also pleased to note that Member
States are now actively involved in planning to improve the
sustainability of their pension payments. It is inappropriate to
propose common solutions for Member States since their basic
positions differ so much.

In this context the Committee believes that Member
8.2.1.
States should examine the potential use of the use of sup-
plementary schemes (the second and third pillars) as supportive
measures but recognises that supplementary pensions are not
a panacea.

8.3.
The Committee strongly emphasises the link between
longevity and health and long term care costs as well as
pensions. The Committee welcomes the planned work by the
Economic Policy Committee to establish the likely long term
profile of these costs. The special costs of the disabled should
not be overlooked.

8.4.
The Committee believes there is also a need to modify
pension arrangements to reflect changes in society itself and
welcomes the fact that this is clearly recognised in Commission
communications.

8.5.
The Committee believes that a major contribution
to sustainability could come through improved economic
performance — an increase in GDP growth rates could make
it possible not just to reduce unemployment but to generate
higher labour market participation. Achieving this will how-
ever be a major challenge and will require concerted action
programmes focused on these targets. The work of
the
Economic Policy Committee is making a substantial contri-
bution to a better understanding of the opportunities in this
area.

The potential implications of increasing pension costs
8.6.
on Member States is so significant that the proposed use of the
open method of co-ordination is to be warmly welcomed. The
setting of common objectives with appropriate indicators will
reassure Member States that all other States are taking action
and also provide a learning opportunity to transfer experience
from one Member State to another.

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The Committee recommends

8.7.
the applicant
countries be encouraged to undertake similar assessments of
their pension systems to assess long-term sustainability.

that

Brussels, 29 November 2001.

8.8.
Finally the Committee stresses again the need for
action now to address the crucial issue of the sustainability of
pensions which is of vital concern to all existing and future
pensioners in the EU.

The President

of the Economic and Social Committee

Göke FRERICHS

Opinion of the Economic and Social Committee 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’

(2002/C 48/23)

On 5 July 2001, the Commission decided to consult the Economic and Social Committee, under Article
262 of the Treaty establishing the European Community, on the above-mentioned communication.

The Section for Employment, Social Affairs and Citizenship, which was responsible for preparing the
Committee’s work on the subject, adopted its opinion on 7 November 2001. The rapporteur was
Ms Cassina.

At its 386th plenary session (meeting of 29 November 2001) the Economic and Social Committee
adopted the following opinion by 92 votes in favour with one abstention.

1.

Introduction

1.1.
In response to the mandate entrusted to it by the
Stockholm (1) and Gothenburg (2) European Councils, on 3 July
2001 the Commission published a Communication (3) to the
Council, the European Parliament and the Economic and Social
Committee on ‘Supporting national strategies for safe and
sustainable pensions through an integrated approach’.

(1) ‘... the potential of the open method of coordination should be
used to the full, particularly in the field of pensions, taking due
account of the principle of subsidiarity.’

(2) ‘... to prepare a progress report for the Laeken European Council,
on the basis of a Commission communication setting out the
objectives and working methods in the area of pensions’ ...

(3) COM(2001) 362 final.

1.2.
The discussions and assessment of the content of the
communication will provide input for a report for submission
at the Laeken European Council (December 2001), when the
Member States are to reach an agreement on the objectives
and on the means of securing safe, sustainable pension systems
in the EU. This should be done within a framework of
voluntary cooperation, coordination, exchange of best practice
and comparable statistics, along the lines of the Commission’s
proposals in its 1999 communication on the more general
aspects of social protection (4).

Before it received the referral mentioned in point 1.1
1.3.
above,
the Economic and Social Committee had already
decided to set up a subcommittee to draft an opinion on
‘Economic growth,
taxation and sustainability of pension
rights in the EU’. The subcommittee’s opinion will comment

(4) COM(1999) 347 final
social protection’.

‘A concerted strategy for modernising