All across Europe people are waking up to an inconvenient truth: The cushy, lifelong government and employer pensions they’ve enjoyed for more than half a century are unsustainable.
Continue Reading Below
Although it lagged the U.S. by several years, Europe also experienced a baby boom after World War II followed by a “baby bust” resulting in its own Generation X when the boom ended and birthrates fell.In addition, thanks to medical advances, Europeans have enjoyed increases in life expectancy similar to those seen on this side of the Atlantic, and the continent is also feeling the impact of having fewer individuals in the workforce to support the benefits being paid out to an aging population of retirees.
The difference is that the U.S. began coming to grips with these challenges decades ago. Federal legislation in 1978 allowing the creation of 401(k)s signaled the recognition that employers and the government (through Social Security) had limits on what they could afford to provide and that individuals needed to bear some responsibility for generating the income required to support a lengthier retirement.
When it was announced that by 1983 Social Security would be insolvent, i.e. unable to pay out the benefits that had been promised because it would not collect enough in payroll tax to cover its promises, the tax rate was raised. Most folks didn’t like the idea of paying more, but they did it. We have also gradually raised the “full” retirement age for Social Security benefits.
In other words, we’ve been making adjustments and introducing new incentives to encourage people to save more- from tax-deductible IRAs to Keoghs for the self-employed to Roth accounts. But until relatively recently, the average European has clung to or insisted upon the “big brother” model which essentially held that their employer or the government or some combination of the two owed them the retirement income they had been promised. Demographics and financial reality be damned. Two years ago when French President Nicolas Sarkozy signed legislation raising the retirement age from 60 to 62, it touched off violent riots in the streets.(1)
But the facade has been stripped away by the perfect storm of economic events the world has recently experienced. The global credit crisis, recession, tumultuous stock and bond markets and bankrupt government coffers finally forced Europeans to face the facts.
In a major survey of 9,000 individuals- 1,000 in nine countries- Transamerica’s non-profit Center for Retirement Studies in collaboration with parent company Aegon has uncovered a seismic and pessimistic shift in European attitudes about retirement.(2) Seventy percent of those polled believe future generations of retirees will be worse off. Just 16% of French workers are optimistic about retirement and 41% of Hungarians estimate that they will need more income when they retire than they are currently earning in their job. Catherine Collinson, president of the Center for Retirement Studies, says events of the past few years have caused underlying assumptions to change. “Now governments, industry and people are scrambling to come up with a solution.”
Guess what? Some of the things we’ve already put in place here in the U.S. are looking rather attractive. Collinson says she was surprised when some of her European colleagues described the United States as being “in the vanguard” of retirement planning.
Some European firms- especially in the U.K.- have already adopted “shared-risk” plans which, like 401(k)s require employer and employees to make contributions and do not guarantee more than a minimum benefit at retirement. If your investments happen to turn out better than that, good for you.
Moving workers to a less paternalistic retirement system will be slow and painful. Attitudes have been ingrained for decades. For instance, according to Collinson, there is “a general recognition of the need to work longer and delay retirement to help bridge the shortfall in retirement savings and affordability.” But it’s going to take time for this to affect behavior. As you can see from the graph below, when asked about how they envision their transition to “retirement,” 30% of all respondents (across all 9 countries) said they would stop working immediately and completely.
Notice that in France, 45% of those surveyed plan to stop working immediately. At the opposite end of the spectrum, only 18% of U.S. workers say they will cease work entirely when they “retire.” More than half will “change” their work patterns, which includes working part-time- a concept that is largely- and literally- foreign to Europeans.
Regardless of nationality, one thing that individuals agree on is that their employer is the top resource they are counting on to help them prepare for retirement: 44% of employees believe the company they work for should be required to contribute to their retirement plan. One out of four thinks their employer should provide a menu of benefits and let employees choose the ones they want and 10% say their employer should just make a retirement plan available, but does not have to contribute to it.
“Despite challenges in the retirement landscape,” says Collinson, "people are adjusting their expectations.” Among other things, they’re realizing that “retirement is not an entitlement. You have to work for, prepare for and take a practical approach” to it. In response to the question, “Do you feel you are personally responsible for having sufficient assets in retirement?” a surprising 69% said “yes”- ranging from a high of 84% in the U.S. to a low of 50% among Polish workers.
But before you get all smug and uppity, recall that the federal deficit here in the U.S.is roughly $15 trillion. In 2010 and again last year, Social Security did not collect enough in payroll in order to cover the benefits owed to current beneficiaries; it had to use interest on the bond in the Trust Fund to make up the shortfall. Medicare is a train wreck. Americans may be slightly ahead of the retirement curve in some respects, but we certainly don’t have this figured out by a long shot. For all we know, the next break-through retirement plan concept could come out of Hungary!
“There’s a tremendous advantage to forming a global [dialogue] where we can learn from each other’s experiences, identity and implement solutions and share outcomes,’ says Collinson. Indeed. As the song goes, “It’s a small world after all.”
1. In what is viewed as largely a gift to unions, last June Sarkozy’s liberal successor, Francois Hollande, signed a measure allowing certain workers to still be able to collect benefits at age 60. According to government estimates, this will cost the already-strained French retirement system the equivalent of more than a billion dollars next year and nearly $4 billion by 2017. http://online.wsj.com/article/SB10001424052702303753904577450000181349894.html
2. The 9 countries include the U.S., U.K., the Netherlands, Poland, France, Sweden, Germany, Spain and Hungary.
Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.
If you have a question for Gail Buckner and the Your $ Matters column, send them to: email@example.com, along with your name and phone number.