Wednesday, August 1, 2012

You've Got to Move

The collision of demography and politics in the current crisis should push EU policy makers to move quickly on some of the unfinished business of European integration. In response to my recent post on the outmigration of qualified young people from the parts of Europe undergoing the worst of the recession, Steven Hill asked why that is a bad thing - isn't that what labor mobility is supposed to mean?

Yes, in the US, at least before the housing collapse meant that many people are stuck with homes they can't sell, people in areas with high unemployment moved to places where jobs were more plentiful. And that is how labor markets should work.  In Europe, though, even beyond the difficulties imposed by factors like language and culture, there are impediments to labor mobility that need policy action.  The portability of pensions is an issue that has to be solved.

While state pensions are relatively straightforward and EU workers who retire in a different EU country than the one(s) where they were employed can apply for the accumulated pensions.  However, in the case of private supplementary pensions, which are not covered under current EU regulations, many people face the loss of significant contributions when they move across borders, which is an obvious disincentive for mobility. 

One thing we know from the crisis is that state pensions in the future will be wholly inadequate to support the elderly. Lower state revenues and aging populations will put tremendous pressure on pension systems. Dependency ratios (the proportion of the very young plus the old to the working population), already high in Europe, are expected to double by 2060 in low birthrate countries, which also in large part are the countries in the worst financial shape. This makes it imperative to put incentives into place for additional savings beyond state schemes, to ensure that retirees are able keep accumulated private funds wherever they live and to sort out how they are to be taxed.

Recently, Benoît Cœuré, a member of the Executive Board of the ECB, noted that the European Council has taken measures to increase mobility and pension portability.  With this shift in thinking, he claims, European policy makers "are acknowledging that the smooth operation of the single currency requires flexible markets for goods, services, and labour."

Still, it has been close to a decade (2005) since the Commission published its first proposal for a directive covering supplementary pensions. Little progress has been made in that time. This year, the Commission is supposed to restart work on a pensions portability directive. Although exact figures are hard to come by, it is clear that the number of young and talented Europeans leaving home to find work is exploding - last year 1.7% of the Irish population, mostly in their 20s and 30s, left and between 2001 and 2010, the percentage of Italians with college degrees who were living abroad doubled from 8.3% to 15.9%. 

These trends highlight how critical it is that the Commission move on a new directive and push member states to come to an agreement.