Europe's Ageing Population and Pension Problem

Europe’s demographic landscape is shifting towards an increasingly older population. The continent, once benefiting from a demographic dividend, now faces a profound transformation, with ageing populations dominating. Alongside this ageing phenomenon, there is an increasing emphasis on old-age income support, driven by the significant demographic transition. Pensions and old age income support have turned into an issue of growing importance, presenting a varied challenge for governments and their social welfare systems.  The provision of economic security for the elderly may well be the single biggest social and economic challenge facing European economies.

Historically, post-war European societies have relied on robust pension systems, which have long been a cornerstone of European social welfare, ensuring financial security for retirees. However, evolving social structures, characterised by smaller families and increased mobility among younger generations, have heightened reliance on state and occupational pensions. Yet without significant reform, traditional pension models risk becoming unsustainable.

Many European countries, particularly Italy, Germany, and Spain, are experiencing some of the fastest ageing populations in the world. By 2050, it is projected that over 30% of Europe’s population will be aged 65 and older.  The current model of pension sustainability is a growing concern amid this demographic shift.

Italy exemplifies this demographic crisis. According to the Organisation for Economic Co-operation and Development (OECD), over 24% of its population is aged 65 or older, one of the highest proportions globally. The country’s ageing crisis is further strained by a pension system under financial pressure.

While long regarded as one of Europe’s most comprehensive frameworks, Italy’s pension system has become increasingly unsustainable due to rising life expectancy (age 84, in 2023) and declining birth rates (1.24 children per woman, well below the OECD average of 1.51, in 2023). Despite relatively generous public pensions, coverage issues persist. Italy’s state pension system primarily focuses on the “pay-as-you-go” model, where a shrinking workforce faces mounting pressure supporting a growing number of retirees through social security contributions. As the dependency ratio rises, the burden on pension funds intensifies.

Despite various reforms, including raising retirement ages and encouraging private pension savings, systems remain financially fragile. France, for instance, has faced widespread unrest over pension reforms, highlighting the difficulty of implementing necessary but often unpopular changes. This model in reorganising potential pitfalls has seen other alternative methods of reprieve, such as the UK, which shifted towards private and occupational pensions in 2012. Despite a broadened approach by introducing mandatory pensions, many retirees still experience financial insecurity due to inadequate savings, while the workforce fears that their final pensions will not sufficiently cover retirement living.

Some countries have pursued alternative solutions to mitigate the ageing crisis. Sweden’s transition to a notional defined contribution (NDC) system has created a more sustainable model by linking benefits directly to lifetime contributions. Europe’s largest economy and population, Germany, like France, has gradually raised the retirement age to 67, whilst also promoting private pension savings to diversify their approach.

The Netherlands is transitioning from defined benefit schemes to more flexible defined contribution plans, balancing risk and sustainability. The new framework, part of the Future of Pensions Act, also introduces collective defined contribution (CDC) schemes, which maintains long-term viability, while eliminating costly guaranteed payouts. Denmark’s pension system has shown similar restructuring to the UK’s, integrating a universal basic pension with mandatory occupational schemes, is widely regarded as one of the most effective in ensuring both coverage and adequacy.

Conversely, some reforms have faced more criticism than others. Belgium’s fragmented pension system, divided among employees, the self-employed, and civil servants, has led to inefficiencies and inequities. The disparity between these schemes often results in significant variations in pension benefits, with some retirees receiving substantially more than others based on their employment type rather than their contributions.

The system has been criticised for its complexity, administrative burden, and lack of fairness, making it difficult to implement uniform reforms. Recent efforts have aimed to simplify the system, while gradually increasing the retirement age to 67 by 2030. Additionally, a pension supplement has been introduced to support lower-income retirees, prioritising pension adequacy and preventing financial distress. However, these measures may not go far enough in addressing the structural imbalances that continue to threaten Belgium’s pension sustainability.

While pension reform remains the most viable solution, political resistance, economic constraints, and social opposition create substantial hurdles. As previously alluded to, governments have introduced both mandatory and voluntary pension schemes to supplement public pensions. However, these often benefit those with the means to contribute rather than those most in need. A lack of strong incentives further discourages voluntary pension savings, exacerbating financial strain on public systems.

Despite reforms, a critical issue in European pension systems is benefit adequacy and indexing to inflation. Many pension schemes fail to adjust sufficiently to rising living costs, diminishing retirees’ purchasing power over time. Defined contribution schemes present additional challenges, as retirees may not have contributed enough throughout their careers to ensure financial security in later years.

As European pension systems grapple with coverage, adequacy, and long-term financial sustainability, the need for substantial reform is clear. To remain viable and continue providing economic stability for an ageing population, pension systems must evolve to address these pressing challenges.

While reforms progress in maintaining the viability of pensions, we at Axco are constantly updating our reports, mapping out these major changes, offering key insight into pension systems, not only in Europe, but worldwide.