Though there’s a lot of concern about the retirement crisis in the U.S with much criticism about the defined contribution (DC) system which includes 401k plans, the situation in Europe is worse with little hope in sight according to a recent Wall Street Journal article (subscription required). A European pension crisis is indeed looming.
Most Europeans rely on state funded retirement plans rather than corporate retirement plans like DC or defined benefit (DB) pension plans. The problem is that there is little to nothing saved by these countries relying on funding from tax revenues like Social Security. But a coming demographic tsunami is being fueled by lower birthrates compounded by increased life longevity.
With the largest number of pensioners in the world, there are 42 people over 65 not working for every 100 people working in Europe. That number is projected to grow to 65/100 in 2060. Compare that to just 24/100 in the U.S. and you can see why one analyst says that some countries are close to bankruptcy. And it’s not just a case of rich v. poor countries either though some like Greece are worse off and have been gradually cutting benefits to pensioners. Experts predict that Social Security will run out of money in 2035. Ironically, the flood of immigrant workers in Europe might help but not in the short term.
So it’s really strange that a throw away provision in the U.S. tax code, section 401k, may be the answer although very few people in European countries other than the UK have accumulated significant savings in DC plans. Though U.S. workers generally do not save enough, invest wisely or have enough money to last a lifetime, at least there are assets in the plan and, through the auto-plan, things are getting better. Perhaps that’s why states are starting to require that all companies of a certain size offer employer sponsored, payroll deducted retirement plans at the workplace.
