LONDON - Continental Europe's unfunded pay-as-you-go pension systems might not be the great bogyman experts believe, according to one recent analysis.
Kevin Gardiner, a senior economist at Morgan Stanley & Co. International Ltd., London, suggests in a recent research article that continental Europe might not face a pension problem if it can reduce unemployment and correct the rigidities of its labor market.
"Europe may have a labor market problem, not a pension problem," he wrote.
Continental Europe's pension woes have become a favorite whipping post for British pension experts.
A recent controversial report by the House of Commons' Social Security Committee warned Great Britain could end up subsidizing - directly or indirectly through higher interest rates - the cost of unfunded pension systems on the Continent.
In a subsequent Commons debate in December, David Shaw, Conservative Party MP for Dover, said total European pension liabilities could reach 10 trillion pounds ($17 trillion). Failure to include such liabilities in determining whether European Union countries meet Maastricht treaty criteria "represents one of the biggest fudges ever concerning the single currency," he said.
In a press release, the European Commission denied member states would be forced to subsidize other EU country pension debts. But recent French government concessions to striking truck drivers, permitting them to take early retirement at the age of 55, have only exacerbated British concerns over the ability of continental governments to rein in their pension obligations.
Morgan Stanley's Mr. Gardiner, however, thinks those concerns might be misplaced. If continental Europe were to follow the United Kingdom's lead and reform its labor markets, the ratio of workers to those they support through transfer payments might actually improve and could alleviate funding problems for Europe's pension systems, he argues.
What Mr. Gardiner does is look at the proportion of workers to all dependents - including all retirees and unemployed workers, even though the latter groups often are paid by separate retirement and welfare systems. The net cost to active workers, through their taxes, is the same, he said in a phone interview.
Other evaluations of pay-as-you-go systems tend to examine payments made only to retirees, and thus underestimate how many active workers are supporting those not in the workforce.
Mr. Gardiner took the example of France, which has a 12% unemployment rate. Most experts fear France's aging population will worsen the problems of its pay-as-you-go system. In the next 25 years, the proportion of French retirees aged 65 and above within the general population will rise to 21% from 15%, while the proportion of workers will decline to 63% from 65%.
That means the dependency ratio - the proportion of retirees to active workers - will jump to 33% from 23% between 1995 and 2020, according to estimates by Eurostat, the statistical arm of the European Commission and the Organization for Economic Cooperation and Development.
But these data ignore that many workers are not fully employed - which exaggerates the proportion of people at work - and that unemployed and other non-working adults are excluded from the number of dependents, making the proportion appear too small, Mr. Gardiner said.
Including these groups, the current full measure of all adult dependents soars to 42% of the total population - compared with only 15% when looking only at retirees. Excluding minors, there is 1.1 dependent for each French worker.
Then Mr. Gardiner took a giant leap of faith. If France adopts the United Kingdom's employment patterns and flexible working practices during the next 25 years,the ratio of adult dependents to the total population would shrink to 39% by 2020.
If France's participation rate rose to Britain's current 74% and unemployment fell to 5%, the ratio of adult dependents to workers would plunge by one-fifth to 88% by 2020, he wrote.
"This is a sensational result, and, although it takes no account of details such as the extent of part-time employment and low pay, it illustrates the potential importance of changes in labor market practice," Mr. Gardiner wrote.
"In principle, today's pay-as-you-go European unemployment benefits and intra-family transfers . . . could provide tomorrow's pay-as-you go pensions - if European labor markets reform," he concluded.
But pension experts remain unconvinced by Mr. Gardiner's arguments. Ann Robinson, director general of the U.K.'s National Association of Pension Funds, London, said the article "is provocative and fun, but it needs a health warning because it's playing with numbers."
If Mr. Gardiner's arguments are right, then the British government shouldn't have any problem funding the State Earnings Relation Pension, which it has been cutting back over time, she said.
Furthermore, Ms. Robinson said the study ignores demographic shifts occurring within Europe. Germany would only be able to meet its pension liabilities through massive immigration, she noted.
Mr. Gardiner's premise that labor market reforms would improve funding of state pay-as-you-go pensions is correct, but "I think he's vastly overstating his case," Ms. Robinson added.
One economist, who asked not to be named, also thought Mr. Gardiner had "overegged his omelet."
He noted the Paris-based Organization for Economic Cooperation and Development had projected that France's net debt - which incorporates pension liabilities and reserves - would just remain relatively stable through 2015 as a percentage of gross domestic product, edging down to 37% from 38.3% in 1996.
However, during the following 15 years, net government debt is projected to more than double to about 88% of GDP, the OECD projected. If Mr. Gardiner had projected another 10 years out, he might have produced different figures, the economist said.
Koen de Ryck, permanent representative for the European Federation for Retirement Provision, Brussels, said assuming the Continent would adopt Britain's labor market model is a huge "if."
"Most people on the Continent are not big admirers of the U.K. labor market model . . . nor of their industry policy and achievements," he said.
Mr. de Ryck also questioned Mr. Gardiner's statistics, saying they are "unclear and highly theoretical."
But if Mr. Gardiner is right, it would spell better equity returns on the Continent, where stock returns traditionally have lagged other international stock markets. Plus, Mr. Gardiner questioned the reliability of dependency ratios.