Pensions are the Old Continent’s age-related ailment

Europe’s ruling classes are aware that the Old Continent is the world’s ailing patient and faces three existential challenges: technological innovation, to make the economy competitive with the United States and China in cutting-edge sectors such as AI and to break free from the mid-tech industry trap; the energy transition, to achieve greater autonomy and reduce costs for households and businesses; security, to be able to defend itself against external threats, such as Russia, in a more hostile world where Washington’s protection is no longer guaranteed. The problem, however, is that other issues, such as pensions, dominate the election agenda.

In Germany, immediately following the AfD’s shocking victory in Saxony-Anhalt, Finance Minister and SPD leader Lars Klingbeil – junior partner to Chancellor Friedrich Merz (CDU) – has called into question the grand coalition government’s reforms, and in particular the pension reform, with a view to scaling it back. A change made necessary by demographic trends, but one that is extremely unpopular, especially with other elections just around the corner (Berlin and Mecklenburg-Western Pomerania on 20 September).

The situation is even more complicated in France, where Emmanuel Macron’s presidency has lost much of its political capital over the pension reform, which has failed. The law, passed in 2023, has in fact been put on hold until 2028, and all the presidential candidates are promising to abolish it, or even to introduce a counter-reform to lower the retirement age to 60: from Marine Le Pen on the far right to Jean-Luc Mélenchon on the far left, with the more moderate candidates representing various shades of the same political spectrum. All this is taking place against the backdrop of a country like France in fiscal crisis, with a deficit exceeding 5 per cent and rising.

Andy Burnham’s new Labour government in the UK faces similar problems, having arrived at Downing Street with a promise to expand the welfare state. But London, too, is grappling with fiscal problems and rising borrowing costs. Burnham could free up resources by scrapping the ‘triple lock’ – the generous pension indexation system that adjusts pension payments based on the highest of three parameters: wage growth, inflation or 2.5 per cent. This mechanism inflates pension expenditure and has cost far more than was estimated when it was introduced in 2011. But, once again, the problem for Burnham is that tampering with the triple lock would boost support for Nigel Farage’s Reform. Finally, in Italy – the country with the highest pension expenditure – the Meloni government, in an effort to stem Vannacci’s rise, is already considering pension reforms in the forthcoming Budget Bill, such as freezing the adjustment of the retirement age to life expectancy, as called for by Matteo Salvini.

Europe is thus on the verge of being overwhelmed by its demographic dynamics, which, on the one hand, are increasing the burden of unsustainable pension expenditure and, on the other, are swelling the numbers of older cohorts, thereby strengthening the political clout of those who oppose reforms to the system. In an ageing Old Continent, the horizon is narrowing and the challenges concerning the future often stop at retirement age.