How is the pension system in the US different to Europe?

Bernard Delbecque, of the European Fund and Asset Management Association (Efama), shares with us his thoughts on financial security in old age, which he first aired at a recent European Money Week event.

Bernard Delbecque, the senior director for economics and research at Efama, took part in a webinar in late March that marked European Money Week. The European Banking Federation organised the webinar, which also involved Professor Olivia S. Mitchell, who in 2020 published a book with Annamaria Lusardi called ‘Remaking Retirement? Debt in an Aging Economy’.

During a panel discussion, the pension systems of Europe and the US were contrasted and Delbecque highlighted how Europeans – despite having generally better systems than in the US – still lag the US in taking more personal responsibility for financing their retirement.

Here are three questions put to Delbecque and his answers.

To what extent the situation in Europe different from that in the United States?

Household debt is a much less severe problem in Europe because most countries in Europe have built large welfare states, while the US has maintained a much less generous social protection system.

For this reason, the cost for education and health care is much smaller in Europe than in the US, and therefore European citizens don’t have to borrow as much as in the US to have access to this type of services.

This does not mean however that financial fragility is not an issue in Europe.  More than 18% of EU citizens are at risk of poverty or social exclusion in older age. And Europe’s ageing population and the current pandemic will worsen the problem.

How does the retirement landscape look now in Europe compared to the United States?

Only a few Member States in Europe have reacted to the ageing population challenge by developing a system heavily geared towards funded pensions. This is particularly true in the Netherlands, Sweden, the UK and Ireland. Even if the pension system in these countries may have some limitations, it is in a much better position to deal with population ageing than in countries that are still based mostly on pay-as-you-go (PAYG) pension systems.

In most of those countries, policymakers are facing a dual challenge: the challenge of maintaining adequate financial security in an ageing society, and the challenge of securing the sustainability of PAYG pension systems and public finances in general.

It is encouraging that the High-Level Forum on the CMU and the European Commission in its new CMU action plan have put forward some very good solutions. I would mention three of them.

  • The introduction of auto-enrolment to increase the number of employees saving toward a pension.
  • The development of pension dashboards to provide Member States with a comprehensive view of the adequacy of their pension systems.
  • The introduction of pension tracking systems to provide citizens with an overview of their future retirement income and encourage them to take action to prepare for their own retirement.

Against this background Efama, together with Insurance Europe and PensionsEurope, have decided to launch an annual ‘European Retirement Week’ in November to boost people’s awareness of the need to save for retirement. We will communicate on this initiative in the coming weeks.

What are your recommendations to tackle the issue of financial security in old age?

What is required is a holistic approach that should rest on two central pillars: proactive pension policies, and financial literacy and investment education.

The actions in these areas should aim to overcome the inertia that prevents the vast majority of European citizens to take responsibility for their own future well-being.

American citizens are well aware of the shortcomings of the US social protection system, and this has led many of them to save money for things like education and retirement, and to trust financial markets with their savings. 

In Europe, many people continue to trust the state to get a decent pension and cover their expenses in the area of healthcare and children’s education.  In addition, not many Europeans understand the merits of diversifying their savings towards capital market instruments to achieve a better return. 

So, the policy challenge is to find solutions that could prompt people to adopt a new mindset, to change their behavior to improve their financial well-being.

In addition to the measures needed to boost retirement savings, new initiatives should be taken to improve people’s financial literacy and investment education.  The objectives to be achieved in this area should include the following ones:

  • Increasing knowledge of basic financial concepts such as real return, compound interest, risk diversification.
  • Removing misconceptions concerning financial markets.
  • Promoting an understanding of the implications of saving and investment decisions on society and the environment.
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