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Pension systems are not easy to comprehend. In Europe several different pension designs coexist. A short story might shed some light on why people take pride in the pension system of their country.

The European Union is an ageing political community and home to several different pension systems. Typically people are very attached to the pension system design of their own country. Yet, few of us really comprehend how the systems in the other countries work and why people are so attached to them. How could they be since their system is so different from ours? This is an interesting question considering that public pensions are the most significant item of social spending in our welfare states.

I have had the privilege of working with pension experts from all over Europe. Maybe the following short fictional story will help explain the variety of European pension systems a bit more.

One rainy day in Brussels a group of pension experts from different countries convened together to discuss the best way to organize old-age income security. This is how the discussion went.

The Dutch expert: “As Mercer has pointed out for many years, the best way is the way we do it. You guarantee a sufficient basic pension for all residents. On top of that each sector agrees on a funded pension scheme that best suits them. These funds should be invested in a sustainable way around the world so that we can partake in the growth of foreign economies and diversify the risk.”

The French expert: “Mais non, absolutely not. The pension system should operate on the basis of répartition, or pay-as-you-go, as you call it in English. The pension system is a unifying force and the hallmark of solidarity between citizens and across generations. Unlike funded schemes, paygo is not sensitive to the booms or busts of the financial sector. Investing in families and pronatal policies can secure that the demographics will be good enough to sustain a pay-as-you-go system.”

The German expert: “Well, the most important thing is that the pension system supports our economies, export industry included, and gives incentives to take up work. Pensions means a redistribution from those that currently work and produce to those who do not. It is important to have a rule that shares the risk if the demographics deteriorate. The system should be based on transparent rules.”

The Swedish expert: “Or maybe you can look at how we have done it in Sweden? It works very well, you know. You fix all the parameters of the pension system and let pensions decrease if necessary. Buffer funds will smoothen the impact of demographic changes between birth cohorts. This way the pension system will last without any reforms at least until the next Ice Age.”
The Finn remained silent. She was afraid that whatever she would say, the others would not understand her hybrid model.

[The story, and all nationalities portrayed in this text, are fictitious. No identification is intended or should be inferred.]

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Finnish Centre for Pensions – Central body of and expert on statutory earnings-related pensions