The European Union finds itself in a paradoxical situation. The population is ageing, the economy is stagnating, and at the same time, vast sums of citizens’ savings are lying idle in bank deposits. According to the European Commission, 31% of Europeans’ savings are unused in bank accounts. In contrast, Americans put their money to work much more efficiently, keeping three times less cash under the mattress. The key difference lies in Europe’s underdeveloped funded pension systems, which could redirect these savings into investments to secure a dignified retirement.
Pension systems based on saving and investing allow people to accumulate retirement funds that do not depend on the ratio of workers to retirees. The money people set aside for monthly pensions is invested, generating returns and supporting the broader economy. In contrast, pay-as-you-go social insurance systems immediately pay contributions out to today’s retirees – meaning that this money does not participate in value creation.
As society ages, it becomes harder for governments to sustain this model: the number of retirees rises, the workforce shrinks, and the burden on current contributors grows. Unsurprisingly, pension costs have been one of the primary drivers of increasing public sector spending over the past two decades. That leaves less money for other priorities, such as defense, education, and healthcare.
State-run “socialized” pension systems became popular in Europe partly for historical reasons. Two world wars and the hyperinflation during the interwar years wiped out people’s savings – in some countries, savings were even confiscated by the government to fund immediate needs. These experiences eroded public trust in long-term saving.
After World War II, most European countries built pension systems based entirely on current contributions since saving and investing were considered too risky. For some time, this system worked alright: the working-age population was growing fast, economies were recovering, wages were rising, and so were pensions. But in recent decades, the trend has reversed – retiree numbers are soaring, and governments’ budgets are struggling to keep up with pension payments. Yet many European governments ignore these warning signs and resist reforms that would strengthen pension saving.
Greater incentives to participate in funded pension systems would support a more dignified retirement and help kick-start Europe’s sluggish economy. The European Commission, led by Ursula von der Leyen, has acknowledged that the EU is falling behind the US and other countries, especially in high-tech sectors. Every day, innovations like artificial intelligence and self-driving cars are being developed in Europe and across the ocean.
Underdeveloped pension investment systems mean European companies lack capital – the billions of euros sitting idle in bank accounts could become productive investments in innovation and product development here in Europe. It is estimated that these unused savings cost the European economy around 350 billion euros in lost investment every year. The situation in the US is way different – take Apple, for example. Its growth was partly financed by pension fund capital, which ultimately meant bigger pensions for American retirees.
If Europe could shake off its inertia and harness corporate potential and private capital, the economic returns could help offset the impact of demographic decline. Policymakers are trying to pick up the pace: a few months ago, the European Commission announced its “Savings and Investment Union” strategy. The plan is to issue recommendations to member states on boosting participation in pension saving, improving public understanding of its financial benefits, and reviewing pension fund regulations.
Changing course, however, will not be easy. Some countries are actively moving in the opposite direction. Over a decade ago, Hungary, Slovakia, Bulgaria, and Poland allowed people to opt out of pension accumulation systems, and Estonia followed suit recently. Lithuania now plans to do the same. Still, suppose the EU’s strategy turns into real action. In that case, Europe can unlock those idle savings for a stronger economy and a more dignified retirement.
Written by Ernestas Einoris
Continue exploring:
How Can We Make People Understand That Healthcare Is Not Free?
Lowering the Retirement Age in Poland: Costly Long-Term Consequences