“Excessive austerity in the EU is putting our pensions at risk”

The number of senior citizens in the total population is increasing rapidly. This has consequences for the financing of old-age provisions. Has the European Commission taken sufficient account of this in the multiannual budget for 2028-2034? We discuss this with Johan Barnard, Head of International Public Affairs at APG.

The new multiannual budget will take effect in 2028, but the Commission is already presenting its plans. This is because the presentation of the budget traditionally marks the start of two years of negotiations between the member states. They all want to receive as much money as possible and pay as little as possible.

The European Commission wants to receive €2,000 billion for the years 2028-2034. This is considerably more than the current multi-year budget of over €1,200 billion. A significant portion of the increase is intended for new ambitions in areas such as defense, climate transition, innovation, and start-ups and scale-ups. But are they also considering challenges such as an aging population and the question of how to sustain the pension system?

First and second pillars
“Pensions are a matter for Member States, not the EU. The way in which member states address pensions primarily impacts their national budgets. Barnard is referring to the fact that in a number of larger member states, the first pillar of their pension system —financing through a pay-as-you-go system —is more important than a collective, employer-funded second pillar or an individually saved third pillar. “If the increasing financing burden becomes too high, old-age provision in such member states could be at risk,” Barnard explains.

What can be done? Should Europe adopt a more flexible approach to the rise in public debt among its member states? Not according to the Dutch government, nor Barnard. After all, allowing budget deficits and public debt to rise leads to additional inflationary pressure. This is also true in the Netherlands, as acknowledged by the Scientific Council for Government Policy (WRR) in September 2024 in its report “European aging in focus, dealing with pension budget risks.” Barnard: “The WRR warns that a scenario of rising deficits in other member states will automatically have cross-border consequences for the Netherlands, which will almost inevitably be negative. This is because inflation erodes the purchasing power of capital-funded pension benefits. For the WRR, this means that the outcome of discussions on aging and pensions in other EU member states is also in the Dutch interest.” The Commission’s response is to strive for more economic growth, preferably also in those member states where aging and pensions are becoming a significant problem.

Investing in defense, climate, etc.
The Commission points out that, to achieve this, we must first invest in areas such as defense, climate transition, innovation, and start-ups and scale-ups. The Commission also aims to utilize financing instruments and guarantees more effectively to make unprofitable parts of these areas financially viable. There is also support for a greater role for institutional investors. In this way, European money could act as a flywheel, says Barnard. He believes that this could mean additional investment opportunities for pension funds. “Precisely in those areas where we would already like to do more. With the additional growth, state financing of the first pillar will also become easier.”

The Dutch government agrees with the European Commission on this point, namely that more investment is needed. At the same time, however, the Netherlands considers it more important that the European budget does not increase too much and that the Netherlands’ net contribution per capita (i.e., contributions minus income from the EU budget) does not exceed that of comparable wealthy member states. Because the Netherlands and a few other frugal member states are sticking firmly to this negotiating position, the share of renewal in the multiannual budget has been much smaller than what the Commission had proposed, certainly in the last three rounds of negotiations. “Outgoing Minister Heijnen (Finance) is also sticking to this. And when it comes to the aging population in other member states, they will have to raise the retirement age or possibly reduce benefits. However, these measures are obviously unpopular and are meeting with considerable resistance. You can see that in such member states, for example, in France, the deficits are still rising,” Barnard says.

Reciprocity
He argues that the Netherlands should partially revise its frugal stance. “I think it is reasonable that the Netherlands does not want to pay more per capita than comparable wealthy member states.” Barnard thinks it is regrettable that the Commission did not propose a “fairness instrument” in its recently presented multiannual budget to achieve such a fair result. "But I think it is less sensible for the Netherlands to make such a big deal of the absolute size of the EU budget. It would be better to create room for this. Thanks to its low national debt, the Netherlands can easily afford this. However, this must be conditional on stricter rules for financing being applied throughout the budget. Clear and measurable results must be agreed upon and achieved by the member states before the Commission transfers the allocated funds to them."

In this, the head of International Public Affairs at APG finds the European Commission on his side. The Commission is investigating a system in which member states receive funding (for example, for national reforms, such as those of the pension system) based on concrete results, known as performance-based payments. To this end, member states must draw up a plan and only receive funding once they have demonstrated performance. This helps member states to pursue sensible policies. The Commission also proposes that it be agreed now that, in crisis situations, the Commission can issue loans to member states that are short of capital in order to help them cope with such a crisis. However, the Dutch government, led by outgoing minister Heijnen, is not enthusiastic about the joint issuance of EU debt. In fact, the government program rejects this outright and sees no reason to reconsider it at this time.”

A missed opportunity
Barnard considers this a missed opportunity when he looks at the aging population issue. “The WRR report clearly states that it is in the Netherlands’ interest to provide other member states with more assistance in tackling the aging population and pension issues.”

The debate surrounding Eurobonds, bonds issued jointly by the 20 member states of the eurozone, also plays a role in this context. The Netherlands has consistently opposed the introduction of Eurobonds. Wouldn’t joint debt issuance in crisis situations be a backdoor way of agreeing to the introduction of Eurobonds? Barnard believes this argument is overstated. “What the Commission seems to be proposing are bonds that are guaranteed by the EU budget and not directly by the member states, and even less so by each member state individually, and for the total amount issued. Only in the latter case would these be real Eurobonds.” In his personal opinion, Eurobonds should also be open for discussion in the long term, provided that they are accompanied by adequate and enforceable conditionality. Of course, member states should no longer be able to shift their problems onto other member states by creating excessive public debt, and they must also resolve any pension and aging issues in a timely manner. “But for the long term, it is also interesting to see whether Eurobonds, together with the banking union and the Savings and Investment Union (SIU, ed.), can strengthen the international position of the euro to such an extent that it can take over part of the dollar’s role as a reserve currency. It is precisely because the dollar fulfills this role that the US can afford a huge budget deficit. Trump is creating uncertainty about this. If Europe can assume some of this role and finance any deficits more easily, this would certainly lead to additional economic growth. And pension funds will certainly want to buy such Eurobonds.”