The reforms, however, will not prevent those systems from going bankrupt. In 1996 the Organization for Economic Cooperation and Development estimated that the net present value of future social security commitments as a percentage of gross domestic product amounted to at least two and a half times the size of GDP in 9 of 13 EU countries (figures were not available for Luxembourg and Greece), and the net present value of the unfunded pension liability exceeded 100 percent of GDP in 6 of those 13 EU countries.
In a pay‐as‐you‐go system, the government taxes active workers to pay for the pension benefits of retired workers, thus severing the link between effort and reward. Contributions to social security are a tax on the use of labor, not an investment. As the elderly become a larger part of the EU’s population, the ratio of active workers to retired workers decreases, which means that European workers will have to pay even higher taxes than they are paying today to finance social security programs. With 18 million workers unemployed (about 11 percent of the EU’s labor force), the negative impact of high payroll taxes on employment is already evident. Consequently, any policies that further increase the cost of labor would be politically unpopular and economically unsound.
A reduction of benefits would be just as unpopular and insufficient to stave off the eventual bankruptcy of the system. Reducing benefits would also be unfair to senior citizens, most of whom, because they have been deprived of the satisfaction and dignity of providing for their own retirement, depend on the government for their retirement income. Finally, from a politician’s point of view, reducing pension benefits is tantamount to political suicide because senior citizens make up about 16 percent of the EU’s total population (and, of course, a higher percentage of the voting population).