Pensions are both a huge economic liability and a gigantic wasted opportunity for the European Union. The EU already has fewer than three residents of working age for every pensioner. The median EU citizen is 45, six years senior to an equivalent American and four to a Chinese person. Public spending on retirement benefits, health and long-term care for the elderly is equivalent to a fifth of the bloc's GDP. Resources are diverted away from important investments in sectors like defence and infrastructure.
In many European countries, most pensions are furnished by public "pay-as-you-go" schemes: contributions are deducted from workers' wages as a payroll tax and used to finance payments to current pensioners, with precious little invested. In Germany, France, Italy and Spain, these systems cover more than 90% of employees. They run up large deficits that governments must plug, from 2% of GDP in Germany to 6% of GDP in Italy, according to the Boston Consulting Group.
Occupational schemes exist but are small, and because they often guarantee minimum payments, a lot of the proceeds are invested in safe government bonds. In the EU's four biggest economies only about a fifth of the money in such schemes finds its way into capital markets. Individual pension plans tend to charge eye-watering fees which eat into already meagre returns.
America's pension funds manage $43trn in assets, equivalent to nearly 140% of GDP. In the EU as a whole, the figure is just over $5trn, less than 30% of GDP. If all EU countries had pension assets worth 140% of GDP, these pots would hold nearly $30trn. If a quarter were invested in equities and a fifth of that stayed in Europe, the pool of capital available to European companies would grow by $1.5trn—substantial relative to the $18trn market capitalisation of the STOXX 600.
A few countries show things do not have to be this way. In proportion to GDP, Sweden's pension assets are roughly as large as America's; those of the Netherlands and Denmark are even higher. At least 20% of those three countries' pension portfolios are invested in equities. Some large Dutch occupational funds have around half their portfolios parked in European assets. The AP4, one of the funds that backs Sweden's pay-as-you-go system, invests 15% in Swedish equities and 9% in Swedish bonds. Although only 5-10% of Danish funds' equity holdings are domestic, this still leaves them disproportionately exposed to the local stockmarket, which accounts for just 0.5% of global market capitalisation. A lot of this equity capital flows to local businesses, helping explain why the three countries have some of Europe's most vibrant stockmarkets.
Philosophy: A route of many roads leading from nowhere to nothing.