It is said that one of the core values of Europe is diversity. This certainly holds true when looking at pension systems. There is such a diversity of actors, financing mechanisms as well as public-private mixes that it is easy to conclude that Europe embraces diversity as much in its pension systems as in its cultures and languages.
Fortunately, the European pension systems can be traced to two different origins: the Beveridgean pension systems, which offer flat-rate pensions complemented by separate supplementary pensions, and the Bismarckian pension systems, which offer earnings-related pensions without a similar need for supplementary pensions.
In general, cross-country comparisons concentrate only on statutory pension systems, putting countries on a different standing. As a result, countries with large statutory pension systems, such as Austria or Finland, are the odd ones out in this kind of setting.
There is surely some merit to this perspective, as statutory pension systems play a bigger role in public finances. It is equally important to take a broader look and to include supplementary pensions. The financial resources within a country are limited, and both statutory and supplementary pensions take their fair share.
This is the main reason why we at the Finnish Centre for Pensions took on the laborious task of comparing the total pension contribution level in nine European countries. Our recently published report includes both Bismarckian and Beveridgean, EU and non-EU, as well as, eurozone and non-eurozone countries.
In addition to contributions and taxes, countries finance their pensions through prefunding or, in some cases, by issuing bonds to finance the pension system. It has to be noted that our report excludes the income from financial markets; they would require another study.
Grasping the Whole Picture
At first glance, it looks as if the compared countries’ total contribution levels are relatively close to each other. They vary from about 12.5 to an ample 16 per cent of GDP. Depending on what is used as the indicator (wages or GDP), the position of the countries differs a bit.
Good benefit levels do not come for free, as our results show. The countries (e.g. Germany and Sweden) that have stressed the affordability of their pension systems contribute the least to their pensions. This comes as no surprise.
Countries that have emphasised sufficient pensions (Denmark and Austria) require the highest contribution income. Again, this is no surprise as contributions and expenditure are correlated. The majority of pension financing is based on the pay-as-you-go principle, and thus pension income and expenditure are close to each other.
It seems that countries with Bismarckian (Austria, Germany) and Beveridgean (Denmark, Sweden) backgrounds do not show any regularity in how they rank in the comparison. They occur both in top and bottom positions.
Scratching Beyond the Surface
For a deeper analysis, we looked further at the payers of the pension bill. A variety of mechanisms exists when it comes to the financing of pensions.
The financing sources and their shares vary greatly between countries. The employee’s share is the lowest in Denmark and the highest in the Netherlands. The highest shares of tax revenues are found in Germany and Denmark. Again, pension systems with Bismarckian or Beveridgean backgrounds do not show a consistent pattern.
Our report clearly shows that more attention should be paid to the multidimensional pension landscape in cross-national comparisons. Otherwise, there is a risk of losing essential parts of the pension puzzle. It goes without saying that, with missing pieces, the puzzle cannot be solved.