Difficulty
Before we dig into finding answers, let's have a quick glance at history. The pension system, as we know it today, is a relatively new thing. Not so long ago, we would work as long as we could (until death).
The idea of a state pension came up in the 1889 with the German "iron" chancellor Otto von Bismarck. But it was not a generous system. The retirement age was set at 70 years, at a time when the average life expectancy was only 46 years. The lucky ones who reached the retirement age did not pose a significant burden for the state budget.
Most pension systems of developed countries work on a similar basis with slight differences, being based on the principle of intergenerational solidarity.
Working class contributes a part of their earnings through the state to finance pensions for the retirees (their parents and grandparents). When today's workers retire, their children and grandchildren will take on this responsibility. This is what we call a pay-as-you-go scheme.
Demography - what awaits us in the future
This kind of system can only work if the demographics work in its favor, when the working population keeps either growing or constant. However, that is not the case in the EU. See the population pyramid below:
Source: commons.wikimedia.org
There are two key takeaways that stem from this:
- There are fewer and fewer children being born, shrinking the future size of the working class.
- The large working-age population today will become a large retiree population in the future, drawing benefits from the system and depending on their children’s and grandchildren’s generations to support it.
Statistics don’t lie. Fewer working people and more pensioners can only mean one thing - lower pensions. With today's birth rate of 1.34 children per couple, let's not expect a sudden change for the better. The EU birth rate is thus well below the 2.1 natural replacement rate required to preserve the current population size.
Carpe diem, I won’t even live up to reach the retirement age
Many young people think they do not need to worry about their pension because they will never reach retirement age, but this is very unlikely. The life expectancy of EU children born today is about 82 years, and it has increased by 1 year over the last 10 years.
With the retirement age in the EU being mostly in the 65-67 years range, be ready to spend at least 15 years in retirement.
This trend is likely to continue in the future. In some EU countries, the people are living as long as 84 years on average. We simply live healthier, work in better conditions, and the healthcare system is at a completely different level today than it used to be.
Of course, the increased life expectancy is good news for all of us. It is only problem for the state treasury. It is impossible to keep paying a high lifelong annuity to a growing number of pensioners when the working population is shrinking.
And what would happen if you prepared responsibly for retirement and did not live to see it, or if you enjoyed it only for a few years? The money accumulated in private investment accounts would be inherited by your close relatives. This also generally applies to savings in your pension saving schemes, although only in certain cases.
Do not rely on the state
The days when we could count on the state are gone now. Whether that was ever a case is debatable. Nonetheless, it's time for us to realize this and act accordingly. The key step of preparing for retirement is starting to invest on your own.
You should save and invest at least 10-20% of your paycheck. The productive period of most people is about 40-45 years of life. However, the period of earning money ends one day. After that, you will have to live off of the state pension and your own savings. The income is temporary; the expenses will remain with you until the very end.
Create an account and start investing today
Do you want to spend the last 15–25 years of your life sitting on the couch watching TV because you cannot afford anything else? Or do you want to enjoy holidays, spa visits, coffee with friends, and day trips with your grandchildren without worrying about making it to the end of the month? The choice is yours.
Things to remember before you go
- Fewer workers + more retirees = lower pensions
- Invest at least 10-20% of your paycheck to keep your living standards on the same level even after retiring
- You will likely spend at least 15 years in retirement, and you should prepare yourself accordingly
