Privatize Europe's Public Pensions

Europeans are aging so fast that their lavish, state-funded pension systems will soon no longer be able to cope. The International Monetary Fund predicts that the ratio of retirees to workers in Italy will more than double, from around 28% in 2000 to 60% by 2050. Similarly powerful demographic trends are evident right across the euro zone. Paying for all those pensioners will be prohibitively expensive. No wonder financial experts say that retirement schemes currently funded by taxes are unsustainable.

Yet most euro zone governments have done next to nothing to resolve the problem. To be sure, Germany has introduced a modest reform that reduces the benefit from the public pay-as-you-go system and introduces private pension funds. But it isn't radical enough to allow a significantly larger pensioner population to be supported by a smaller workforce. Other countries such as Italy and France have tinkered with existing systems. But they show no sign of embracing the far-reaching changes that will ultimately be needed. The Italian government has repeatedly withdrawn reform proposals in the face of strenuous opposition from special-interest groups. In France, Prime Minister Lionel Jospin has ruled out the introduction of private pension funds.

It's time that politicians stopped dragging their feet, took on the opponents of change, and pushed through radical reforms. Unless they take action, and quickly, their economies will be crushed under the burden of supporting a fast-growing army of pensioners. It's evident that ordinary European citizens are more and more worried. That explains why people are pouring money into mutual funds and other long-term savings products. They fear that state pension systems will soon no longer be able to guarantee them a comfortable old age.

That may be good news for the financial institutions, which are scrambling to manage those assets. But what the euro zone economy really needs is privatization of most pensions. Nothing less than that will solve the Continent's demographic problem.

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