Pension reform recommendations in the EU socioeconomic governance
Demographic ageing has sparked the European Commission to recommend countries to introduce pension reforms. In our article ‘Financial sustainability above all else?’, we analyse the recommendations given in the framework of EU socioeconomic governance between 2011 to 2023. How well do these recommendations match the objectives set by the Social Protection Committee in the Open Method of Coordination (OMC)?
Since 2011, EU member states adhere to the European Semester (ES), an annual framework for the coordination and surveillance of economic and social policies. The ES is governed by a multitude of EU instruments, including fiscal rules, strategies, and guidelines. Each year, as a part of the ES, the Commission proposes and the Council adopts country-specific recommendations. These recommendations should then guide policy reforms in the member states in the following year(s).
We compiled all the recommendations given in the European Semester as well as those made as part of the financial rescue packages during the European debt crisis. We then analysed them against the three main objectives of the OMC on pensions: (i) financial sustainability, (ii) adequacy of benefits and (iii) modernisation of pension systems in terms of gender equality. The objectives are measured against pre-defined indicators.
Financial sustainability driving recommendations
In total, almost half (45 %) of the countries receive at least one pension-related recommendation each year. Both economically stronger and weaker member states received recommendations. Luxembourg and Poland received recommendations most often. Estonia, Sweden and the UK never got a pension related recommendation. On the other hand, Greece, Lithuania, Cyprus and Slovenia received the most recommendations in one single year, eight.
Next step was to analyse the content of the recommendations. A total of 438 pension-related recommendations were given. We classified 177 of these as general in nature. They addressed one the OMC’s main goals of adequacy, sustainability or modernisation without describing exact policy measures. The rest (261) were specific in nature, detailing a policy to be adopted such as equalising the lower retirement age of women with that of men.
Table: Types of pension reform recommendations, 2011–23
| Type | Number | Share in % |
|---|---|---|
| General recommendations | ||
| Sustainability | 124 | 70,1 |
| Adequacy | 34 | 19,2 |
| Modernisation | 19 | 10,7 |
| Total | 177 | 100 |
| Specific recommendations | ||
| Increase retirement age | 70 | 26,8 |
| Prevent early exit | 51 | 19,5 |
| Phase out special schemes | 31 | 11,9 |
| Change benefit indexation | 21 | 8 |
| Others | 88 | 33,7 |
| Total | 261 | 100 |
| General recommendations | 177 | 40,4 |
| Specific recommendations | 261 | 59,6 |
| Overall | 438 | 100 |
The table shows that the recommendations focussed on financial sustainability of pensions, while adequacy and modernisation were less frequently addressed. We find this bias problematic. As an example, Estonia did not receive a single pension recommendation, but its older people are one of the EU’s most at risk of poverty. Similarly, Romania has a high at-risk-of-poverty rate for women but has never been recommended to improve its pension benefits.
No room for adequacy or modernisation?
Our article shows the direction of EU pension reform recommendations. Most of them focus on making pension systems financially sustainable, through cost containment measures, with less focus on making them adequate and modern.
The distribution of specific recommendations reinforces this notion: they concern raising the statutory retirement age, especially for women, and extending working lives by closing pathways to early retirement and phasing out special pension schemes that allow for earlier retirement. When looking at the determinants of the incidence and frequency of recommendations in our model, we see that both depend heavily on indicators that capture the financial sustainability of pensions, particularly the employment rate of older workers.
Future research should analyse why financial sustainability dwarfs the other two objectives. It is problematic that important issues like adequacy and modernisation get little attention, even though they can help in making pension systems sustainable and safe. Modernized pension systems respond better to the needs of changing labor markets and adequate benefits ensure people’s trust in pension schemes. Policy makers should invest time into considering how to overcome the financial bias. A revamped pensions strand of the OMC could play a stronger role in the European Semester. This could ensure that the Semester process is not seen as another way of promoting cuts in social policies and leaving member states to figure out how to establish a modernised form of adequate pension provision on their own.
More information:
Financial sustainability above all else? Drivers and types of pension reform recommendations in the EU socio-economic governance (Julkari.fi)
About the Co-Author: Jan Helmdag (Stockholm University)
