Ancient Greece (and Germany)

March 2010

Are we heading for a standard European Union retirement age? The question has to arise after Greece, under pressure from the financial markets because of its huge deficits, agreed to raise the pension age to 63 by 2015. Until now, Greek public sector workers have rarely been working past age 59.

But such early retirement ages may be hard to justify if, as expected, Greece ends up being bailed out by the rest of the EU. The Germans have already agreed to increase their retirement age to 67. Why should hard-working Germans send money to the Greeks so they can retire four years earlier?

The EU was set up as a monetary, rather than a fiscal, union. From the start, that made some doubt whether it was viable as a single currency area. If California struggles, the Federal government can help out. Voters in Texas will put up with this as they feel part of one nation, and can easily move to California if they want.

It does not really work in the EU. Countries that have played by the rules, reining in deficits and controlling labour costs, may resent bailing countries like Greece, which have not. Like rescuing the banks, this is a classic case of “moral hazard”; if the feckless countries are rescued, that destroys the incentive to be prudent.

The initial attempt to deal with this issue, the Growth and Stability Pact, has proved ineffectual. The big countries have been unwilling to fine the small, in case they break the deficit rules later on. So one answer could be to establish common standards for social provision across the euro area. Given demographic trends, pension spending is one of the biggest fiscal headaches for EU governments going forward; so it might be tempting to ensure that all countries have similar pension regimes. At the very least, countries applying for EU aid should be expected to offer pension benefits that are no more generous than those of the donors.

A further increase in the retirement age – probably to 70 – across the developed world is surely inevitable. It will not bring much in the way of immediate deficit reduction but it will give investors confidence that governments are willing to tackle their long-term fiscal problems.

But the really tricky issue is not the state pension age, but that of public sector workers. The private sector has had to abandon the defined benefit promise as too expensive; the public sector has kept on promising. In many countries, like Greece (and of course the UK), the public sector is the last remaining stronghold of the trade union movement. And public sector workers have the ability to bring parts of the economy to a halt, as I found to my dismay when I was forced to stay an extra day in Athens because of an air traffic controllers’ strike.

As more countries come up against deficit constraints over the next few years, the battle between taxpayers and public sector workers over pensions is sure to become intense.