Can Europe still afford its generous state pensions?
Rising numbers of older people across the continent are straining budgets and making for some difficult political decisions
Mary McDougall in London, Amy Kazmin in Rome, Olaf Storbeck in Frankfurt and Leila Abboud in Paris
When Emmanuel Macron ran for re-election in 2022, he did what few French politicians dare to do: tell voters that the retirement age would have to rise to ensure the continued viability of the country’s generous pensions system.
He delivered on that pledge a year later at great political cost, forcing the change from 62 to 64 years through a divided parliament and facing down massive national protests that left some streets of Paris and other cities in flames.
The hard-fought victory was ephemeral — just last October, Macron’s embattled prime minister, Sébastien Lecornu, was forced to abandon the reform to buy the support of leftist lawmakers needed to pass a welfare budget and ensure the government’s survival.
“It’s a really bad situation with high spending,” says Antoine Bozio, professor at École des Hautes Études en Sciences Sociales, adding that “a lot of the financial problem in France is due to the pension system”.
The episode showed yet again that pensions are the third rail of politics in France.
But similar, less extreme debates over how to pay for the retirement social safety net are under way all over Europe as the continent ages.
Across the EU, 47 per cent of the bloc’s social protection expenditure is spent on old age and survivors’ benefits, ahead of 36.7 per cent spent on sickness and disability and 8.7 per cent on families and children.
Even in the UK, where private provision plays a greater role, the country’s fiscal watchdog has forecast that spending on the state pension — the second-largest item in the government budget after health — will rise from almost 5 per cent of GDP to 7.7 per cent by the early 2070s.
Italy has the EU’s highest pension costs at just over 15 per cent of GDP, according to statistics from the European Commission.
France and Greece each spend over 14 per cent.
In Germany, a third of all federal tax revenue will be spent plugging holes in the state pension system this year, according to an estimate by Munich economic think-tank Ifo.
“The root of the problem is: how do we fund increased spending on defence, the energy transition and new technologies, while spending so much on pensions?” Bozio says.
“If we want to keep spending so much on pensions then we have to raise taxes.”
Jens Südekum, a German economist who is advising the country’s finance minister, has called the pension system “the big elephant in the room”.
In France, the audit office estimated last year that the country’s pension deficit, currently around €1.7bn, could grow to €15bn by 2035 and balloon out to €30bn by 2045 if further reforms are not made.
European countries have tried to tackle their surging pension costs since the 1990s, and have had some successes, with many lifting the state pension age from 65 to 67 or more.
Italy has tied its pension age to life expectancy, while France has pegged annual pension increases to consumer price inflation rather than earnings.
In some countries, spending on pensions as a percentage of GDP is set to fall in the long term as a result of such moves.
But even these measures have run into political opposition in major economies, where politicians are starting to push back against automatic increases in pension ages.
Germany has locked in pension levels relative to average salaries until 2031, rather than allowing them to fall.
In the UK, lawmakers wary of a pensioner backlash tiptoe around the issue of the “triple lock” — a policy that guarantees state pensions rise at the highest of earnings, inflation or 2.5 per cent — even though the cost of the policy is forecast to be triple the initial estimates.
The options for serious reform, such as more private provision, a shift to Canadian-style funded systems or reductions in benefits, would require a degree of political and public consensus that few believe is currently achievable.
A recent YouGov poll on attitudes to the state pension in six European countries underlined the contradiction.
Most people in France, Germany, Spain and Italy believe their state pension systems are already unaffordable and likely to become more so, it found.
Yet there was net opposition in many countries surveyed to the obvious remedies, including further raising state pension ages, increasing taxes on workers, means-testing pensions or allowing more immigration, as Spain has done.
Ministers across the continent are well aware that declining fertility rates, rising life expectancy and low growth could still overwhelm the progress made so far.
“All the parties in the current government had very harshly criticised the law,” she adds.
“But in the end [it] is the centrepiece of a sustainable path for public finances, and it was understood that this could not be cancelled.”
In most big European countries including Germany, France, Italy and Spain, the state provides the main earnings-related pension, paid for by contributions from current workers, which aims to replace a proportion of pre-retirement income.
Such systems were modelled after the one created by Otto von Bismarck, who introduced national state pensions in 1889 to ward off surging socialism and strengthen loyalty to the authoritarian German monarchy.
“My idea was to win over the working classes — or should I say, to bribe them — to regard the state as a social institution that exists for their sake and cares for their wellbeing,” he later told a British journalist.
It paid up to 20 per cent of average salary to industrial workers when it became payable.
It was designed to prevent destitution rather than facilitate a comfortable retirement.
Other countries soon followed.
In the UK, Prime Minister David Lloyd George ushered in old age pensions in 1909.
This system, which later became known as “Beveridgean” after a landmark report on welfare provision by William Beveridge in 1942, paid flat-rate benefits.
A full UK state pension is currently close to a third of median earnings; private provision, usually through workplace schemes, is meant to provide additional security in retirement.
Both systems are “pay as you go” — state pensions are paid for from a mix of current contributions and general taxation.
High birth rates and postwar economic recovery during the 1950s and 1960s meant few worried about the sustainability of such arrangements, and state pensions became much more generous than their original design.
Italy has one of Europe’s highest replacement rates, with pensions paying out close to 80 per cent of average earnings.
Contribution rates, from workers and their employers, are correspondingly high at 33 per cent of earnings in Italy, 28 per cent in France and 19 per cent in Germany.
“France and Italy have very high contribution rates . . . Germany has some difficulties because you have an average contribution rate but ageing that is quite elevated,” says Hervé Boulhol, a senior economist at the OECD.
That compares with an average of over 20 per cent in the UK — paid via national insurance — and just 11 per cent in the US.
The expansion of welfare systems across Europe means that old age is no longer synonymous with financial struggles or a dependence on family.
Pensioners can now expect to lead healthier and longer lives.
France has one of the lowest poverty rates among large economies, with fewer than 7 per cent of people aged over 75 receiving an income that is below half of the population average, according to the OECD.
Even in the UK, where state pensions are less generous, that figure is almost 19 per cent — compared with nearly 27 per cent in the US.
As a result of improving life expectancies, the median age in Europe is now 43 — 12 years older than the rest of the world.
Over the next 25 years, populations in OECD countries will age almost twice as fast as over the last 25 years, with Europe among the worst affected.
Italy and Spain, along with Sweden, have the highest life expectancies in the EU.
At the same time they have very low fertility rates of around 1.2 children per woman — far below the 2.1 average needed to preserve the demographic structure of a population — and rapidly increasing numbers of older people.
By the mid-2050s, both are projected to have more than 75 people aged over 65 per 100 individuals of working age.
As a result, Spain is on course to have the most expensive pensions system in the OECD, according to the Paris-based group, at 17.3 per cent of GDP.
Generous pensions, and the increasing tax burden needed to fund them, have also added to a growing generational divide.
“Italy already has higher poverty rates across young people than older people,” says Vincenzo Galasso, a professor of economics at Bocconi university.
“I’m sceptical about the idea of if it’s a good thing — how much generational justice is there in that?”
In the 1990s, as the decline in birth rates accelerated and life expectancies rose faster than expected, ministers and officials across Europe started to think about how to reduce the burgeoning cost of state pensions.
One way to do this was to make people work for longer before qualifying for it.
The UK, for instance, introduced a new basic state pension in 2016 that required 35 years of national insurance contributions, rather than the previous 30.
Another was to increase the age at which state pensions become payable.
According to the OECD, almost two-thirds of its 38 member countries have planned increases to their retirement ages by 2060.
In the EU, the average age for full state pension benefits will rise to around 67, from under 65 today.
Scandinavian countries have been the most ambitious.
Denmark’s normal retirement age is 67, but will rise to 70 by 2040.
Like many other countries, it has linked pension age to life expectancy increases in order to make the changes more palatable to large cohorts of elderly voters.
But this policy is coming under pressure in some countries.
In Italy, one of the three parties in Prime Minister Giorgia Meloni’s governing coalition called for the pension age to be frozen at its current 67 years — a move that would increase pension costs by 0.4 per cent of GDP by 2040, according to Italy’s independent Parliamentary Budget Office.
After an intensive haggle behind the scenes, a compromise was reached involving a slower rate of increase offset by the end of some provisions allowing for earlier retirement.
“What the government did was say openly to the Italian people — but also to in particular those from the League — to forget about the pension counter-reform,” says Fornero, the former labour minister.
Germany’s pension system has a stabilisation mechanism that avoids big increases in spending despite significant ageing.
But in 2018, Angela Merkel’s government suspended the rule until 2025, and last year that was extended further to 2031.
Some countries are also encouraging workers to save more into private pensions to relieve the burden on the state.
Germany in 2002 rolled out government subsidies for households to invest in private pension schemes.
The complex scheme is being reformed, and could “bring a lot of money into the capital market”, according to Sebastian Külps, head of Germany and northern Europe at asset manager Vanguard.
In late 2025, Italy’s government legislated to automatically enrol employees in complementary pension systems unless they choose to opt out, aiming to boost the participation rate in additional savings schemes from its present level of about a third.
Contributions benefit from a tax incentive of up to €5,300 per year.
“This is a choice that will benefit young people, and without it, we will not be able to guarantee decent pensions in the future,” finance minister Giancarlo Giorgetti said in a statement.
The European Commission has recommended countries introduce auto-enrolment frameworks to make private pensions more attractive and accessible.
A more radical move would be to shift towards a funded pension system, where payments to retirees are part-financed by assets rather than current contributions and general taxation.
Canada did this in the 1990s, creating the CPPIB after realising that its pay-as-you-go state pension system would quickly become unsustainable as its population aged.
The move was unpopular at the time, because benefits were reduced and contributions increased.
But strong growth means it now has over C$777bn of assets under management, and has delivered net income of more than C$500bn since inception.
However, the political will in European countries to set up such a fund is likely to be low.
With current pension contributions used to fund payments to existing retirees, additional payments over a long period would be needed to establish an asset pool to fund future pensions.
Some economists believe that a far simpler solution to Europe’s pension peril would be to revive its sluggish economy, which has grown at around 1.5 per cent per year over the past five years, compared with around 2.5 per cent for the US.
“The basic problem is that the economy hasn’t grown fast enough,” says Rupert Watson, global head of economics at Mercer.
“It’s not what pensioners get is causing the problem — it’s the lack of economic growth.”
Additional reporting by Paola Tamma in Brussels and Barney Jopson in Madrid. Data visualisation by Alan Smith, Janina Conboye and Toby Nangle.
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