"Old Europe" is old in more ways than just its ideology. According to UN projections, in 2050 34 percent of Italians are going to be over 65. Spain, France and Germany face similar aging scenarios.
But if an aging society is not bad per se -- how living a longer life could be bad? -- the problem is that the Bismarckian welfare state is unfit to sustain such a development. In particular, Europe's pension systems were designed at a time when life expectancy was much lower, and the state could easily take over in the field of personal savings. The problem is that now both demography and economics conspire against the welfare state.
Social security system reform is essential in Europe. The continent's population is aging far faster than the US, and immigration is seen here with general contempt. Getting more immigrants into the labor market is not a politically feasible option for many leaders around the old continent. More important, this would just delay, not solve, the problem -- and perhaps would make it worse as time passes.
So, in the long run, changing the system is the only way to guarantee both economic rationality and public consensus. European politicians have long been trying small, parametric reforms; none of them had the courage to pursue the Copernican revolution that is needed to save peoples pensions, and pump development. Incidentally, this doesn't mean that parametric reforms aren't important. It just means they aren't enough.
Reform gets ever more urgent, even in the light of the growing political cost of the reform. Margo Thorning and Pinar Çebi of the International Council for Capital Formation have pointed out that as the population gets older, the political weight of retired people increases, thus making it more difficult to change the rules of the game -- even though retired people would be virtually immune from a reform whatsoever.
The vision Europe needs is Jose Piñera's. Dr. Piñera was minister in Chile in the early 1980s. At that time, he pursued an innovative pension reform that transformed Chilean workers into "workers-capitalists". This is a metaphor Piñera likes, and for good reasons.
In the modern Bismarckian system, a pension is something you get, after you retire, as a substitute for regular income. In a country like Italy, roughly 40 percent of a worker's income is taken by the state and used to finance the pensions of the actual retired people. Young people are in a sense expropriated of their own money -- with the promise, or the hope, that as they get older, their sons and daughters will pay for them. The process is inherently unsustainable, and even harder to defend on moral ground. In fact, the system causes government spending to grow and grow, thus taxes have to be increased in order to maintain the system effective.
Chilean-style reform could succeed in privatizing de facto the pensions, while limiting government spending -- something which is very important in a country like Italy, where the risk is to reduce pension debt by increasing public debt, with no sensible change for the average worker and taxpayer. CERM's Fabio Pammolli and Nicola Salerno, in fact, showed how it may be possible to create an incentive towards a private system, while limiting government expenditure. These measures are a way to make the crisis a bit less incumbent; yet, there's no doubt the iceberg is approaching the European Titanic.
In Chile, after Piñera's reform, a worker's money is spent in a Personal Savings Account, which may be controlled directly by the worker himself. He may decide when to retire, and his pension will depend upon how much he paid during his working life. If a worker finds the amount of the pension suitable, she just has to stop working; otherwise, she may work until a reasonable amount is reached. The pension revolution resulted in a spectacular change in the country's savings rate, which rose from less then 10 percent in 1986 to almost 29 percent in 1996. Workers' PSAs, on average, have given a 12 percent interest rate every year, and pensions amount to about 80 percent of the average stipend.
The key has been the ability to change people's minds towards private management of their money. Without popular consensus, it would have been impossible to convince them to join the new system. Today, about 95 percent of Chileans have chosen the new private system over the old one. They feel more comfortable and safer, knowing that whenever they want, they may "see" their money, invest it in a different way, make their own decisions (and even change their mind) with respect to how to manage the second half of their life.
Europe's current pay-as-you-go systems are unjust, impoverish people, and leave them worse off. Citizens are forced to pay more, and get low pensions. With a Piñerian revolution, workers will no longer be a social class that the state may exploit both economically and ideologically. They will be true capitalists who master their own future. This is precisely why European political elites want to keep them ignorant about the benefits they lose year after year.