Commentary: Why Europe Shouldn't Save For Retirement Yet

As European state pensions feel the squeeze, private schemes have few takers

All across France, Société Générale (SCGLY ) has festooned its branches with posters of a man in Robin Hood garb and the caption: "Take money from the taxman and put it toward your retirement." At rival BNP Paribas, ads for its retirement plan show a pair of feet in diving flippers, stretched out on a tropical beach. It's all part of a government-backed effort, launched this spring, to persuade France's working-age population to set up individual retirement accounts. But the French, although they enjoy sprawling on a beach as much as anyone, aren't biting. Only 250,000 accounts have been opened so far -- barely a ripple in a country of 26 million workers.

True, the program is just getting started, but financial experts say many potential customers have looked it over and walked away. One drawback is that 80% of French taxpayers aren't in a high-enough bracket to take full advantage of tax breaks associated with the program. Another is that, after retirement, account-holders can withdraw their money only in fixed monthly amounts. "The banks and insurance companies are making a big buzz, but it is just not interesting enough for many categories of the population," says Thomas Girard, an asset-management adviser at Groupe Experia in Grenoble.

France isn't the only country shunning IRAs. Britain and Germany both introduced such schemes in 2001, but only 3% of eligible Britons and fewer than 2% of Germans have signed up. That's a far cry from the U.S., where at least one-third of households have IRAs, and 50 million workers save for retirement through employer-sponsored 401(k) plans. It's not as if Europeans didn't think about retirement. But until recently, few Europeans knew much about private retirement savings -- and fewer still cared. After all, Europe's publicly financed pension schemes generally allow them to retire, often at age 55 to 60, with benefits totaling 60% to 70% of their former salaries. But the pay-as-you-go funding of those plans is an increasingly urgent problem, since the ratio of retirees to workers in Europe is rising fast, from 1 to 5 in 2000 to a projected 1 to 2 by 2050. To keep the plans viable, governments are now raising the retirement age and trimming state benefits. Unless governments divert massive amounts from their general budgets, or impose huge payroll-tax increases, state pension benefits will have to be cut an average 30% during the coming 40 to 50 years, according to estimates by the Association of British Insurers. "Old-age poverty, which has almost been eradicated in Europe, could come back," says Steven Ney, a pension expert at Vienna's Interdisciplinary Center for Comparative Research in the Social Sciences.

Employer-sponsored pension plans could take up some of the slack. But outside Britain, where they are common, such plans cover less than 1 in 5 Europeans. Even in Germany, where an estimated 50% of male workers are covered by employer-paid plans, the benefits are so meager that they account for only about 5% of retirement income of covered workers. Many Europeans do salt away money for retirement, but it's often placed in low-yielding bank accounts and insurance policies.

That's why national governments are promoting private pension plans. It's a good idea -- but it won't work unless the schemes are made more appealing to the average worker. France must make its plan more flexible and attractive for those who fall in the lower income brackets. Britain, which is promoting a 401(k)-style plan intended for workers whose employers don't offer them a pension, needs to deal with a kink in its state-financed pension plan that promises extra benefits to workers if they refrain from participating in private plans. "There's an incentive not to save," fumes Richard Saunders, head of Britain's Investment Management Assn.

A dose of straight talk would help, too. European leaders must summon the courage to tell voters that, painful as an overhaul of publicly financed pensions may be, they'll need to make still more sacrifices to ensure themselves -- and their children -- a comfortable retirement.

By Carol Matlack with Adeline Bonnet in Paris and David Fairlamb in Frankfurt

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