Entitlement Programs: Reforming Pensions in Europe
Europeans spend a lot of their public revenue on entitlement benefits. For comparison, the total value of entitlement programs in Europe is at about 25% of GDP, whereas in The USA, it is at 18.5% of GDP annually. Europeans consider it a plus and a great achievement that their governments spend so much on social stability. In certain Greece and Italy, pensions account for more than half of the total expenditure on public benefits. This essay will summarize the nature of pensions and retirement benefits across European countries and why they should be restructured.
Poorly structured pensions systems are one of the reasons Mediterranean countries are in a huge debt crisis. When large portions of the GDP go to pension entitlements, the ability to service goes down dramatically. This is because it means fewer resources can be devoted to unemployment benefits and social programs such as healthcare provision. The long term consequence is that the working class is crippled by the low level of social amenities and thus cannot be productive enough to produce a budget surplus. Therefore, a nation is forced to borrow to service its pension schemes, thus creating more implicit debt. Soon enough, it undertakes austerity measures which are again hindered by the inadequate social protection. This vicious loop is a threat to fiscal stability, as is evidenced by the pressure on countries with such pension schemes to sell government bonds at a low gains rate (Börsch-Supan, 2012).
In other specified European countries, pension schemes produce negative incentive impacts. For example, in the Netherlands and Switzerland, pensions create strong transfer payments from the government to the people. The funds to finance these pensions are mainly drawn from payroll taxes of working citizens (Börsch-Supan, 2012). They drive up the total labor costs as most paid workers find themselves in a position where they have to bankroll the cost of pensions in the budget. It, in turn, drives the demand for labor down with a subsequent greater rate of unemployment and a lower rate of economic growth. Most of the younger people in such countries feel that the labor demand is unpredictable and distorted.
The author provides several steps that may be taken to remedy the situation. One, they can stabilize taxes and regulate the rate of contributions from public taxes to pensions, they can also reduce the rate of replacement rate in the pensions age group by increasing the mandatory retirement age or the qualification age for pensions, besides, they can increase the incentives for personal savings to reduce dependency on savings upon retirement (Börsch-Supan, 2012).
References
Börsch-Supan, A. H. (2012). Entitlement reforms in Europe: policy mixes in the current pension reform process (No. w18009). National Bureau of Economic Research.