In an era of growing economic challenges, the debate around pension reform in Europe has taken center stage. As nations grapple with aging populations and dwindling resources, understanding the dynamics at play is crucial. This article explores the urgent need for innovative pension strategies that remain sustainable and equitable, especially in light of political complexities. Below, we delve into the issues surrounding retirement ages and propose solutions to move forward effectively.
Yves here. I’m not an expert on European budgets or pension schemes, and so am not well positioned to assess the merits of the arguments made below. However, any increase in retirement age will fall hard on workers in physically taxing jobs, including ones that “merely” involve a lot of standing. In addition, it is hard to take any whinging about budgetary necessities seriously when they do not acknowledge how the EU is perfectly willing to spend way in excess of what would otherwise be deemed affordable over the imaginary but elite-serving threat of a Russian invasion, yet pleads poverty as far as pensions and other social safety nets are concerned.
By Javier Díaz Giménez, Professor of Economics, IESE Business School (Universidad de Navarra) and Julián Díaz Saavedra, Associate Professor, Universidad de Granada. Originally published at The Conversation
In early October 2025, with his political future hanging by a thread, France’s resigned-and-reappointed prime minister Sébastien Lecornu pledged to suspend unpopular pension reforms until 2027, when presidential elections will be held.
Socialist MPs declared victory. The French business community groaned. The S&P downgraded France’s credit rating, citing budget concerns.
With France delaying necessary reforms for at least two years, and many European nations facing their own pension dilemmas, it is imperative to explore how to implement pension reforms that are sustainable, equitable and politically viable.
One prominent aspect of the pension reform discussion in Europe is the sheer clarity surrounding its underlying issues. Europe’s population is aging, birth rates are declining, and life expectancy is steadily increasing. Fewer individuals are contributing to public pension systems, while a growing number will rely on those funds for extended periods. Additionally, technological advancements are diminishing the share of labor income in gross domestic product.
Since the majority of Europe’s pay-as-you-go pension systems were established under vastly different demographic circumstances, they must now adapt to contemporary realities. We readily accept adjustments in other sectors, like education, where we rezone school districts and modify construction plans due to shrinking student populations. Conversely, any discussion regarding retirement age adjustments triggers waves of protests in cities like Paris, Madrid, or Brussels.
In France, it is essential to place the reform in context: the proposal seeks to raise the retirement age by merely two years, to 64. In contrast, Denmark adjusts its retirement age every five years based on life expectancy and has recently approved an increase to 70 by 2040 from its current age of 67.
Pension reform initiatives often falter because politics overwhelms economic reasoning. While demographic changes are predictable and their costs quantifiable, necessary policy measures frequently stall due to electoral motivations and public scepticism.
So, how can we navigate these complexities? Rather than concentrating on a single issue like the retirement age, we advocate for a comprehensive approach that addresses both expenditures and contributions while also compensating those initially impacted by reforms. Spain serves as our case study, but the insights are applicable to several European countries, including France.
Automatic Adjustments and One-Off Compensations
A part of the solution lies in integrating new automatic adjustment mechanisms—rules that modify pension benefits in response to evolving economic and demographic realities. These adjustments enhance the predictability and reliability of pension systems and lessen the need for politically challenging ad-hoc reforms.
Additionally, we suggest compensating workers and retirees adversely affected by reduced pensions through a one-time transfer of liquid assets from the government to households.
This policy’s drawback is that it requires government funding, likely through the issuance of new public debt. However, history shows that reforms introduced without compensating those who suffer losses tend to be reversed. As the number of older voters concerned about their retirement rises, any attempts to diminish their benefits will face significant opposition unless they are assured compensation.
Making Pension Reform Viable
For pension reforms to be effective, they should incorporate five key elements:
- Introduce a sustainability factor that connects initial pension amounts to the life expectancy of the retiring worker cohort. Consequently, those who retire earlier will receive lower pensions due to expected longer payout durations, incentivizing longer working lives.
- Implement an automatic adjustment rule to update pension rights and/or pensions to ensure the system’s financial sustainability. Many current systems adjust pensions based on the consumer price index, which is not sustainable as it undermines the pension replacement rate, especially in low or zero labor productivity growth environments like Spain.
- Calculate pensions based on total contributions made throughout a worker’s life rather than focusing on the last 25 years or any limited timeframe. Ignoring early career contributions tends to favor high earners while underfunding the pension system.
- Remove caps on payroll tax contributions while maintaining maximum pension limits, thereby ensuring that higher earners contribute more without receiving proportionately higher pensions.
- Provide a one-time compensation to workers and retirees disadvantaged by these reforms, with funding through public debt. This transitional component facilitates a fair adjustment process and mitigates social backlash against pension reforms.
Collectively, these measures not only enhance the financial sustainability of pension systems by reducing future expenses but also encourage private saving and longer working lives. Providing ample notice of reforms can further lower transitional costs, allowing households to adapt their spending, saving, and retirement plans.
However, such reforms are likely to ignite controversy. Should these strategies be adopted, governments must clearly articulate their benefits and prepare for potential public resistance. They should also communicate that without these reforms, significant tax increases will be unavoidable.
Nevertheless, the alternative is more daunting. Our calculations suggest that Spain might need to raise its average value-added tax by 9 percentage points, from 16% to 25%, to generate the revenue necessary to maintain the current system indefinitely. By postponing crucial pension decisions, politicians risk enacting even less popular tax hikes in the future.
