Longer life expectancy, low fertility rates: for years, Europe has been affected by this situation, which creates a significant imbalance between the working and retired populations. How can Europe become (more) resilient to demographic and socio-economic changes with regard to pension systems?

Led by Italy’s  Bocconi University, opens an external URL in a new window , researchers from Italy, Austria, England, Germany, Poland, Finland and Belgium have been working on this topic over the past three years as part of the EU-funded project “FutuRes – Towards a resilient future of Europe”. Representing Austria on the project were Alexia Fürnkranz-Prskawetz, Miguel Sánchez-Romero and PhD candidate David Zettler from TU Wien.

In the interview, Alexia Fürnkranz-Prskawetz and Miguel Sánchez-Romero explain which scenarios they have modelled, what specifications can be derived from them, and what the next steps will be.

Could you describe the FutuRes project in more detail?

Fürnkranz-Prskawetz: FutuRes has actually been looking at a trend that researchers have been highlighting for many years, but whose effects we are now beginning to feel more and more clearly. Demographic trends are highly predictable, and so demographic change could already be foreseen in the 1980s: a very low birth rate, combined with rising life expectancy, leads to a growing imbalance between a rising number of pensioners and the working population. These developments are placing an increasing strain on pension systems in which the working population, through their contributions, supports the population dependent on pension payments.

In our project, we were able to demonstrate very clearly that pension reforms must take into account not only the financial sustainability of social security systems but also the redistribution of resources between social groups through the pension system. In general, it is not enough to change individual parameters of these systems; major structural reforms are required. 

What was the role of TU Wien in the project?

Fürnkranz-Prskawetz: We analysed pension systems mathematically using an overlapping generations model, which takes into account both intergenerational and intragenerational dynamics. In particular, we also model the heterogeneity of life courses as well as idiosyncratic shocks (specific, unexpected events that affect, for example, individual companies, a particular sector or specific regions, but not the economy as a whole) in the labour market, health and mortality. In Austria, we have what is known as a pay-as-you-go pension system, which means that working people pay for those who are already retired. Whilst in the 1960s there was one pensioner for every four working people, this ratio has shifted to 3:1 in recent decades due to demographic changes such as higher life expectancy and falling fertility rates; this ratio is even expected to reach 2:1 in the future (2050). However, this system is not sustainable in the long term, as pension expenditure will continue to rise.

What were the specific findings of your research?

Sánchez-Romero: We modelled four possible pension reforms with a focus on sustainability and their implications for various socio-economic groups. These reforms consider, on the one hand, a progressive pension system; a pension system in which we vary the minimum pension; or, alternatively, a system in which we raise the retirement age; and a pension system in which we cap contribution rates.  

Fürnkranz-Prskawetz: Before we explain the results, I would like to emphasise that there is no single ideal reform (‘there is no one-size-fits-all policy’). In the long term, the pension system should be based on several pillars; that is, alongside the pay-as-you-go system, private capital-based provision and occupational pensions are two further pillars that should complement the pay-as-you-go system. 

Sánchez-Romero: As my colleague mentioned at the beginning, pension reforms will affect both the sustainability of the system and the redistribution of resources between social groups. Raising the minimum pension entitlement would certainly help the most disadvantaged groups, but it would also increase the costs of the pension system. In contrast, the introduction of a progressive pension system would both enhance the sustainability of the system and improve redistribution within the pension system (by reducing transfers from groups with lower life expectancy to those with higher life expectancy). Specifically, under a progressive pension system, socially disadvantaged groups would receive a higher pension, whilst socially better-off groups would receive a lower pension. 

Fürnkranz-Prskawetz: Perhaps another example to clarify this. Under the progressive pension model, someone on a high income would receive only 72% of their salary as a pension, whilst someone on a lower income would receive 86%. As a result, everyone would have a similar standard of living over one’s lifecycle, much like with the increase in the minimum pension. Both reforms have a positive impact on reducing social injustice and also go a long way towards combating poverty among older women. 

Sánchez-Romero: I would now like to briefly touch on two further reforms we have studied for improving sustainability: raising the retirement age and introducing a cap on contribution rates. These two reforms reduce the costs of the pension system. If we work for longer, this pushes upthe retirement age. If we factor in a so-called sustainability factor, we reduce pension benefits so that the contribution rate does not exceed a certain limit. However, these two reforms negatively affect groups with lower life expectancy. 

Fürnkranz-Prskawetz: Finally, I would like to emphasise that our models highlight various options for action. However, these can only be implemented effectively on a broad scale at the political level. In politics, pension reforms have always been a topic that people are reluctant to tackle. What is often forgotten is that such reforms generate considerable discontent among the population.

The FutuRes project has now come to an end. What happens next?

Fürnkranz-Prskawetz: We are currently presenting the research findings at various conferences, and they are also under review by a number of scientific journals. Each of the countries involved in this project has specialised in different aspects relating to the impact of demographic change. Colleagues in Germany, for example, have researched the topic of age discrimination, whilst colleagues in England have focused on the role of migration and digitalisation in tackling the skills shortage, and our Polish colleagues have addressed the issues of fertility and family development in particular, i.e. the extent to which the current low fertility rates can be explained by economic, institutional, and individual factors. In collaboration with researchers from the University of Southampton, opens an external URL in a new window, we are currently also writing a book to make our models, their calibration and numerical solutions accessible to a wider audience. This book is due to be published by Springer in early 2027.

A follow-up project has also already been launched, funded by the Austrian National Bank. This time, our research focuses on how the pension system is changing income redistribution in our society, taking into account that some members of the population can expect to inherit houses and flats, whilst a large proportion of the population lacks the financial means to purchase them.

Thank you for the interview.

More information on FutuRes, opens an external URL in a new window
Journal article, opens an external URL in a new window by Alexia Fürnkranz-Prskawetz, Miguel Sánchez-Romero and David Zettler