European States Seize Pension Funds

From France to Hungary to Ireland, European governments plunder private retirement savings.

While most countries in Europe are bracing for spending cuts, some governments are hard pressed to implement austerity measures. Multibillion euro pension funds are a convenient source of revenue for politicians who don’t want to cut back on public spending or privatize welfare services.

Across Europe, pension schemes are organized either by the state or by semiprivate institutions that are heavily regulated. Every month, European workers set aside part of their income for their retirement except they are saving not for their own golden years but financing directly the retirement of seniors — hoping that, by the time they retire, tomorrow’s working generation will foot the bill.

Simple demographics have turned this system into a Ponzi scheme of unprecedented scale. In the years ahead there will not be enough people working to pay for those that have already retired. Some governments are raising the pension age to avert total catastrophe but even if people work one or two more years, the system is fundamentally unsound.

Despite the looming insolvency of public pension plans, several European governments have moved to plunder the vast retirement reserves of their citizens in order to finance their short-term deficits. The most striking example is Hungary where the state forced people to remit their individual retirement savings at the risk of losing their basic state pension — while still having to pay into it.

The Bulgarian government devised a similar extortion where some $300 million of private savings was supposed to be transfered to the state pension system. Only when trade unions protested did officials tone down their plans. In Poland by contrast, the government did manage to take in about a third of future retirement accounts. The money taken away from savers will boost the state’s coffers for more than $2 billion a year.

In France, where President Nicolas Sarkozy managed to raise the retirement age despite huge union and student protests, parliament effectively took away €33 billion from future retirees to finance a deficit in short-term pension obligations. In Ireland, €4 billion was taken out of the National Pension Reserve Fund to rescue ailing banks in 2009. Last month, the remaining €2.5 billion was seized to support the bailout of the rest of the country.

Even in the fiscally more conservative countries of Northern Europe, pension schemes are under pressure and warn that they might have to cut benefits several years from now unless legislators act to make them affordable well into the future.

As public retirement plans teeter on the brink of bankruptcy, it is high time that governments consider other options than beefing up their pension funds with regular tax revenue. Privatization may be anathema to many Europeans as well as their political representatives but it shouldn’t be. It may in fact be the only way to save people’s pensions.