Europe is aging badly. This is why its pension system is failing
March “The Economist”Source: Onet
Europe is still called the “old continent”.
In the EU, there are already fewer than three people of working age for every retiree.
Proposals to cut pensions are invariably met with fierce opposition from aging voters. Funds are being diverted from important investments in sectors such as defense and infrastructure.
In other words, pensions are huge economic burden on the EU. At the same time, however, they are gigantic a missed opportunity.
American pension funds manage assets worth $43 trillion. (at the current exchange rate PLN 158 trillion), which is almost 140 percent. GDP. In the entire EU, this amount is just over USD 5 trillion. (PLN 18 trillion) – that's less than 30%. GDP. Increasing it could do wonders for Europe's underdeveloped capital markets.
Limping systems
In many European countries, most pensions are paid from public schemes, usually on a pay-as-you-go basis. Contributions are deducted from employees' wages as a tax and used to finance the payments of current retirees. However, little is invested.
There are some employee programsin which employees save part of their wages. However, they are small and, because they often guarantee minimum payouts, a significant part of the funds is invested in safe government bonds.
In the four largest EU economies, only about one fifth of the funds from such programs go to capital markets. Individual pension plans (which typically benefit from preferential taxation) are equally conservative and often charge high fees that eat into already modest profits.
A few exceptions show that this does not have to be the case
Some large Dutch employee funds invest around half of their portfolios in European assets. AP4, one of the funds supporting Sweden's pay-as-you-go system, invests 15%. in Swedish shares and 9 percent in Swedish bonds – partly to match assets to liabilities in Swedish krona and partly due to mandates favoring domestic investment.
Only 5 to 10 percent comes from the domestic market. shares in Danish funds. Yet they remain disproportionately exposed to the local stock market, which accounts for just 0.5%. global market capitalization.
In the past, investing a significant portion of their portfolios domestically prevented European pension funds from benefiting from rising stock markets in other countries, especially the US. However, the situation is now changing.
A retiree in Munich, GermanyMICHAEL NGUYEN/Getty Images
Need for reforms
First, European equities have recently reached better results than the American ones. Since the beginning of 2025, the STOXX 600 index of large European companies has increased by 36%. in dollar terms, while the S&P 500, its transatlantic counterpart, gained 15%.
US companies are already highly valued relative to earnings, which could reduce future profits, while many of their European peers still appear relatively cheap. Technology companies in Europe are finally starting to play a significant role. This makes them more attractive to pension funds that diversify their investments towards venture capital and other alternative assets.
Reforming the ossified pension systems in countries such as France and Germany to make them more similar to those in Denmark, the Netherlands and Sweden will not be easy. However, the benefits are significant.
If all EU countries had pension assets worth 140%. GDP, which is the same as the USA, these funds would have almost USD 30 trillion at their disposal. (PLN 110 trillion). If one quarter were invested in shares, reflecting participation in Danish, Dutch and Swedish funds, and one fifth remained in Europe, the pool of capital available to European companies would increase by $1.5 trillion. (PLN 5.5 trillion). For comparison, the current market capitalization of the STOXX 600 is $18 trillion. (PLN 66 trillion).
Europe would still be old. But at least she would be more energetic.
© The Economist Newspaper Limited, March 4, 2026
