Pensions are enough to drive anyone to drink

Every spring a group of Parisian financiers descend on a small seaside resort in western France. This is an informal gathering in a large American-style beach house, where much calvados is consumed and the world is put to rights.

Every spring a group of Parisian financiers descend on a small seaside resort in western France. This is an informal gathering in a large American-style beach house, where much calvados is consumed and the world is put to rights.

For me, it has come to symbolise all that is most seductive about France, not least the food and wine. This year the elegant châtelaine of one M&A house managed to change outfits at breakfast, lunch and dinner and still bite my head off on the new economy.

And yet it also symbolises the paradox that is France. My most striking memory is the ease with which the whole colourful cavalcade stepped off a TGV from Paris at the start of the weekend and right back on to one at the end. Never mind that we were in a place no bigger than Hastings. At a time when we struggle to muster the few inches of fast track required to connect London to the Chunnel, the French reach into the remotest corners of their country with a world-class infrastructure.

City analysts doing their post-Budget sums must wonder: how do they do it? How do they combine their high standard of living with even higher government spending? It's not just France. The whole of the continent seems to get away with such largesse. The level of health care spending comparisons alluded to by Mr Blair is a good example.

No doubt, the gap is bridged in part by taxation - there were plenty of complaints about France's heavy tax burden on the beach this year (not least from the lady with the outfits), but at the same time this cannot provide a full explanation. Look at the respective shares of GDP which are taken by taxation, and the differences are not that great.

I believe the real answer is hidden in an area that rarely captures the imagination: pensions. Provision for retirement requires making difficult decisions. Undoubtedly it requires some sacrifice of the present for the sake of the future. Perhaps because of this, as individuals, we often postpone or ignore the subject at some cost to us later. Individuals doing this is bad enough, but imagine when it is done by countries.

Meltdown. This is the crisis we are facing in Europe. So frightening is the subject that little, if any, attention is paid. Or maybe it is simply that people find the pensions issue difficult to grasp.

The dimension of the problem revolves around the interplay between demographics and funding. The ever-lengthening life expectancy of Europe's population is leading to an ageing of its "demographic profile". This is a good thing, but it comes with a price. The price is the balance between those who are working and those who are in retirement. Basically between those who are earning national wealth and those who are spending it. This is known as the dependency ratio. As we age we must ensure that there are enough chipping in so that the rest can take out.

In Europe, this is not happening.

To be specific, the dependency ratio is defined as the proportion of the population aged 65 and over as a percentage of those aged 15 to 64. At the moment the UK has one of the highest ratios (23 per cent), and in the future it will get worse. It will rise between 2000 and 2050 from around 23 per cent to 42 per cent. Pretty worrying. But in other countries the rise is even greater, France goes from 21 per cent to 43 per cent. Worse still, Germany is 22 per cent up to 51 per cent and Italy, oh Italy, 22 per cent up to 60 per cent. For the moment that's two people working to keep three in retirement.

Clearly, this will mean that in the future Europe will have to fund pensions from the savings of the past, not from current income, as at present. So, to get the full dimensions of the problem we must consider what's in the continental coffers. Not very much.

To do this we must master the second ratio - the "pension fund assets ratio". This seeks to measure the value of pension funds as a proportion of a country's GDP. Again we may worry we have not done enough in the UK (the last figure I saw for this was around 80 per cent). But think of Germany - a mere 20 per cent, or worse still France and Italy down at barely 10 per cent. Combine the two ratios and you start to get the picture.

The solution requires massive saving. It requires cutting coats to suit cloths. Has Europe the political will for this? All attempts at pension reform have ended in tears. Meanwhile, the younger worker is taking matters into his/her own hands, massively gearing up personal savings. Anyone under 40 who is reading this column is a victim of generational theft. You could say they have stolen from your future to fund their present. No wonder we reach for the calvados.

Independent Partners: 10 top tips for retirement. Get your free guide here

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