26 November 2000

Progress Report to the ECOFIN Council on the Impact of Ageing Populations on Public Pension Systems

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Apart from some exceptions, the pension systems in European countries are characterised by a strong public component, also known as first pillar pensions.3 In only three Member States (i.e. Denmark, the Netherlands and the UK), is the private component – also known as the second and third pillar – well developed.
Around half of the public pension systems in the European Union offer a universal pension scheme. This is usually means-tested. All Member States have comprehensive public pension systems and – except in the Netherlands – the regimes are labour-market-based covering workers in the private sector, in the public sector, and at least some of the self-employed. The financing system of the public schemes is usually pay-as-you-go (PAYG).4 However, in many PAYG systems pension benefits are also financed through transfers from the state budget. In three Member States (Denmark, Sweden and Finland) the financing system is partly pre-funded. Funded schemes ensure that contributions are invested in funds for repayment to individuals after they have retired.
In most cases, the eligibility requirements for obtaining old-age benefits include a minimum age limit and a minimum period of contributions. Apart from some notable exceptions, 65 years will be the most common minimum age requirement for old age pensions for both men and women after 2004. The requirements for the minimum number of contribution years are much more varied across countries and this is not expected to change significantly in the near future. Currently, the average statutory retirement age for old age pensions currently ranges from 60 to 67 but in most countries it is close to 65. However, all Member States - except for the UK - offer early retirement schemes. Such schemes are usually much more generous in terms of their eligibility requirements.
The average retirement age for these schemes can be as low as 56 in some Member States. As a result the participation rates in the 55-64 age group are low, even very low in some Member States, compared to international standards for high income countries. Indexation of pension benefits is sometimes completely prices-based and sometimes completely wage-based. However, in most cases indexation is a mix of the two. In some countries it is also established, ad-hoc, for example during the budget process.

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