hen Fulbright scholar Doreen Allerkamp, now at Maxwell studying European Union foreign policy initiatives, completes her Ph.D. and returns to her native Germany, she expects to find promising career opportunities yet sobering financial realities. Almost 20 percent of her earnings will be taken from her paycheck and immediately converted into state-funded pension payments for current German retirees.

Further deductions from Allerkamp’s earnings will be used to fund other generous social welfare programs promised to German citizens. But the big chunk out of every paycheck is not even Allerkamp’s chief concern. “I worry more about my own retirement,” she says. “At the rate the German population is aging, I’m wondering if there will be enough young workers to fund my pension.”

It’s not idle apprehension on Allerkamp’s part, nor is it an exclusively German phenomenon. An alarming demographic trend is lending an ironic twist to Europe’s venerable status as “the old world.” By the middle of this century, the median age of Europe’s population is projected by The Economist (8/22/02) to be 52.7 years, up sharply from 37.7 years in 2002. The implications of such accelerated aging are profound. By 2050, 60 percent of Europe’s citizens could be in retirement, collecting state-funded pensions.

Experts on Maxwell’s faculty say the repercussions will change the face of Europe as we know it, undermining its economic and political vitality; depleting its population; challenging its socialistic underpinnings; and—when immigration comes into play—altering its deeply embedded cultural identities.

Aging populations—a product of improved medical care and falling fertility rates—are a global trend that’s hitting the world’s wealthiest nations the hardest. An even distribution of age is a cornerstone of a healthy social welfare system. Americans, facing a mass Baby Boom retirement, realize that too many retirees drawing upon Social Security, and too few young workers supporting it, can strain the system, or potentially break it.

The consequences of population aging are especially acute in Europe, where the vast majority of pensions are state-funded and generous to a fault.

“Americans would drool over the generosity of European pensions, and its social welfare programs in general,” says Margaret “Peg” Hermann, Gerald B. and Daphna Cramer Professor of Global Affairs and director of Maxwell’s Global Affairs Institute. “Americans and Europeans have very different outlooks in this regard.” On average the American Social Security system pays a benefit equal to approximately 35 percent of a retiree’s career-ending wage. European pensions pay an average 75 to 80 percent of a retiree’s final wage. This valuation of retired workers is now built into the European psyche. “Europeans,” Hermann notes, “think we treat our workers abysmally.”

How do European nations pay for such generous programs? Some would say through the nose. The 15 full-fledged members of the European Union—the so-called EU15—spend, on average, 11 percent of their gross domestic products on pensions. That’s more than twice the rate of other affluent countries such as the United States, Australia, and Japan.

Most European pensions are state-funded and constructed on a pay-as-you-go basis, with younger workers’ payroll taxes funding retirees’ pensions. The system works fine with populations in growth mode, fueled by healthy birthrates and/or immigration rates. But Europe’s immigration has generally slowed to a trickle, and its fertility rate—now at 1.4—has long been under the standard 2.1 replacement level. Europe’s workforce, as a result, is thinning at the entry end and bulging at the retirement end. Meanwhile, life expectancy is close to 70 years and will rise, according to The Economist, by another five years in the next half century. Compare that with 1889, when the pay-as-you-go style of pension system was introduced. Life expectancy then was only 48.

“The Europeans may have higher benefits,” warns Mitchell Orenstein, assistant professor of political science and director of Maxwell’s new Center for European Studies, “but their government pensions are becoming unsustainable.”

itchell Orenstein has devoted a large piece of his scholarly career to understanding the social-welfare calamity in Europe and the politics of pension reform, both global and domestic. His most recent book is Pension Reform in Europe: Process and Progress, which he co-edited.

Orenstein is optimistic that Europe can avoid serious aging-related crises. In the short term, he says, it may be necessary to revise the parameters of its overly generous state pensions. Common sense suggests that, when too little is coming in and too much is going out, the rules of the game need to change. “In this case,” Orenstein says, “you increase the age when pensions kick in, decrease their value, or add new sources of pension funding.

“Raising the retirement age is perfectly legitimate,” he says. “People live longer and are able to work longer. Postponing retirement is already underway in France, Italy, and Austria.”

Lowering benefit levels is a sensible option, according to Orenstein, but politically charged. “Changing indexation of benefits gets people very upset,” he concedes. “It’s a very complicated issue. How politically do you take on the vested interests of pensioners and remain fair to the younger generation of workers, who weren’t even born when these benefits were promised?”

In the long term another strategy, Orenstein says, is to change the entire paradigm. Phase out the pay-as-you-go approach to funding, so that today’s workers no longer provide for today’s retirees. Instead, Orenstein explains, countries might phase in mandatory private pension funds similar to America’s 401(k) retirement plans. Sweden, Holland, and Britain have initiated this conversion, with significant success.

“Over time, European countries could shift more responsibility from the state to the individual,” explains Orenstein. “Workers would exercise some control over their accounts and see how their pensions are related to their individual incomes—something most Europeans don’t understand.”

As a bonus, workers might start to better appreciate the math behind their pensions. “If they were funding their own retirements,” Orenstein wagers, “I bet they’d be willing to work a few more years.”

Orenstein is less optimistic about another proposed paradigm change: shifting more pension responsibility to employers. While this “second pillar” solution has been implemented to some degree, it has lost much of its luster. “The model in which an employee’s lifetime loyalty is cemented to defined corporate pensions is now subject to serious reconsideration,” he says. “Today’s workers are more likely to migrate from job to job. Plus, it’s no longer feasible for employers to offer defined benefits. They have overpromised in the past, and now they can’t deliver.”

here is one more approach that appeals to Orenstein: a unified, Europe-wide pension system, which would help spread around burdens and benefits, leveling some of the demographic extremes. Such a system could also “smooth out some of the disparities caused by a single market,” he says.

“But it’s a complicated issue, and it’s pie in the sky at this point,” Orenstein concludes. “The EU has so far been reluctant to interfere so politically. Pension reforms remain national agenda items.”

However, by permitting citizens of member nations to freely cross borders, the EU has set the stage for a pan-European pension system. According to Orenstein, a growing number of Europeans live in one country but work in another. Many employers have operations throughout Europe. 

Craig Parsons, an EU specialist, agrees with Orenstein. An assistant professor of political science, Parsons is director of Maxwell’s European Union Center. His most recent book, A Certain Idea of Europe, examines the spoken and unspoken agendas of EU founders.

“Formally speaking, EU members already have labor mobility,” reports Parsons. “But citizens can’t carry their pension systems from country to country, and there is not yet any serious discussion of this.”

While there is no formal mechanism for sharing the pension burden, EU members are putting their heads together to seek a solution. According to Parsons, the graying of Europe is at the top of the EU agenda. High pension burdens have a huge impact on national spending and fiscal stability—issues of paramount concern for the EU.

“While the EU has limited direct powers—for instance, it can’t force nations to curtail their social welfare spending—it can weigh in on issues of national spending,” says Parsons.

In order to make the Euro strong and non-inflationary, he explains, a Stability Pact was attached to the EU’s Monetary Union deal in 1995. The pact, which sets fairly strict limits on national spending, is one way the EU sets guidelines for its members and assures that no one nation becomes a weak link in the chain. In the pact, the EU countries agreed to keep budget deficits within 3 percent of their respective GDPs, or face substantial fines from the EU. It’s not an abstract notion.

“Portugal has been sanctioned under those rules,” Parsons says, “and France is now on a collision course with the European Commission over this.”

So, while the EU can’t dictate how members approach pensions, it can sanction excessive borrowing incurred to meet pension commitments.

The EU is also addressing pension pressures through a process called Open Method of Coordination. “The OMC is the new buzzword in the EU,” reports Parsons. “It’s a peer-review process where national governments get together to talk about best practices in various areas, including pension reform.” By its very nature, the process sheds light on nations slow to change their pension systems.

However, the OMC is strictly advisory; it has no teeth. “There is no formal agreement to change anything,” says Parsons.

ext year, the EU will formally admit eight new members from Eastern and Central Europe: Poland, the Czech Republic, Hungary, Slovakia, Lithuania, Latvia, Slovenia, and Estonia. By 2007, Bulgaria and Hungary expect to follow suit.

EU expansion may both alleviate and aggravate the aging crisis. “Bringing in these countries may generate a little bit of in-migration to the current member states,” says Parsons. “Every little bit will help offset the coming demographic crash. But it will not be enough to avoid a serious crunch.”

On the negative side of enlargement, the vast majority of the candidate nations face their own changing demographics—and comparably high pension benefits, despite income levels of one-quarter or less.

The incoming EU nations may bring valuable lessons in pension reform to the table. Many of these former communist countries have already grappled with dire pension scenarios.

The relevance of their reform experiences, however,  is a matter of debate. “My understanding is that, relative to Western European countries, most of the new members have indeed done fairly well with pension reform,” says Parsons. “But their politics are so different that nobody views them as models for the West.”

Orenstein concedes that the context for pension reform is dramatically different in Eastern and Central Europe. “A number of the new EU nations have recently adopted private systems to replace pay-as-you-go systems,” he explains. “But they were in the midst of changing their national systems from communist to capitalist, and they were bolder and quicker to innovate privatization. In Western Europe, the culture is more entrenched.”

Nevertheless, Orenstein believes that just swapping tales of pension reform moves the process forward. In April 2001, he helped to organize a World Bank conference on pension privatization in Vienna. “We paired Western and Eastern European countries for discussion and asked them to study each other’s reform progress.” While there is no universal solution, Orenstein believes there is much to be gained from bringing the global politics of attention—and the resources of international organizations like the World Bank—to the pension problem.

hen a nation (or, in this case, consortium of nations) fails to replenish its own population, the doors are often thrown open to immigration—to eager, young workers who flock to the unfilled, lucrative positions available there. For Europe, open immigration seems a logical solution to the aging phenomenon. “It can only help, since current workers pay current retirees’ pensions under the pay-as-you-go model,” says Parsons. “The more workers you bring in, the better.”

For the past decade, however, most EU members have been closing doors to immigrants. In 1992, almost three million people, primarily displaced Yugoslavs, sought refuge in Western Europe. After that, immigration to EU nations dropped dramatically—a trend which pension reform may reverse.

“Population aging is now forcing old Europe to reconsider immigration,” reports Timothy Smeeding, Maxwell Professor of Public Policy and director of Maxwell’s Center for Policy Research. As founding director of the international Luxembourg Income Study, Smeeding understands as well as anyone the push-and-pull of economic factors across borders—and longstanding resistance to “outsiders.”

“Until recently, immigration has remained kind of a new concept in Europe,” he observes. “Europeans have tended to look at immigrants and say, ‘They’re different. They’re strange. They’re not us.’

“Meanwhile, lower-skilled and older Europeans are worried the immigrants will take their jobs and their benefits. So for European nations other than Ireland and Luxembourg, immigration is currently minimal, even though it’s still the only significant source of population growth.”

As a solution, immigration offers only temporary relief. “Yes, immigration brings in more younger workers,” Smeeding says. “But in time these workers age, and their kids need schooling. So immigration involves both benefits and costs.

“On the other hand,” he notes, “all sorts of people are eager to immigrate to Europe. Africans want to go north, and Eastern Europeans want to go to Western Europe.”

To explore the complex implications of immigration, Smeeding and Parsons are organizing a conference next June in Luxembourg, to be titled “Immigration in a Cross-National Context: What Are the Implications for Europe?”

It’s important to explore these issues, says Smeeding, but it’s unlikely that the conference will point to immigration as a panacea for pressures on social-welfare funding. Parsons concurs:  “All analyses now agree. Even if the EU opened all its borders and let everyone who wanted to come in from everywhere in the world, they couldn’t offset a demographic crisis. By mid-century, Europe will be losing population in all scenarios.”

old leadership—at both the national and EU levels—is the key to overcoming problems of this magnitude. But according to Peg Hermann, bold leadership seems in short supply.

 “There has been a steady stream of articles calling for European leaders to put their necks on the line and address the issue of pension reform,” says Hermann, who, in addition to directing the Global Affairs Institute, conducts research profiling political leaders. Hermann, whose list of books includes The Psychological Examination of Political Leaders, has developed methods of assessing leadership style from a distance—methods that have been applied to heads of state, terrorists, and CEOs of multinational corporations.

“Most politicians don’t take the long view,” Hermann observes. “They don’t address problems that are a decade or more away, because they won’t be in power when the crisis occurs.

“Who is going to risk their political position and do what’s right for the public good?” asks Hermann. “Whoever does will lose. Demographics determine who runs for office. As the bulk of Europe’s population ages, Europe’s politicians will cater to these powerful older voters and will not be eager to cut their pensions.”

In her study of leadership styles and mindsets, Hermann has identified a common theme: when a circumstance is problematic but beneficial to a large proportion of the electorate, stasis sets in. “This is what makes it so much easier to enact the necessary level of change in totalitarian, not democratic, states,” she says. “It’s only in a real crisis that voters will grant leaders the opportunity to engage in change.”

Like Orenstein, Hermann believes the EU should lead in tackling hard issues like debilitating pension benefits. “But I haven’t seen people coming to power in the EU with that kind of leadership,” she admits. “The EU seems to breed bureaucrats and technocrats, not visionary leaders willing to take such risks.”

ome view the demographic crisis—the alarming aging of Europe—as the beginning of the end for Europe as we know it. “Even after all available adjustments are made, the social democratic model of European society is going to come close to falling apart as the demographic curve moves downward,” predicts the EU Center’s Craig Parsons.

Orenstein is less pessimistic, partly because he allows for countervailing factors still difficult to anticipate, such as immigration. “The projections for the next 20 years are certainly reliable,” he believes. “If nothing were done, there would be a major crunch as the Baby Boomers retire. But beyond that, it’s hard to predict.” For example, a shrinking labor force creates lower unemployment, which might change some of the formulas. Also, more women might begin to enter the workforce. Or, he says, “Europeans might have more babies. In Sweden, there are significant tax incentives for having children.”

The solution likely lies in a combination of the above, concludes Orenstein. “Existing benefits will be adjusted. Privatization will increase, as will pressure to open immigration and embrace multiculturality. There will be strikes. There will be conflicts. But at the end of the day, there will be compromises.

“In Europe, there has been a broad political contract,” he adds. “There is a longstanding tradition that the state will take care of its citizens. Promises will be broken, and people don’t like that.”

—Denise Owen Harrigan

This article appeared in the Fall 2003 print edition of Maxwell Perspective; © 2003 Maxwell School of Syracuse University. To request a copy, e-mail dlcooke@maxwell.syr.edu.