The true phantom haunting Europe today is not that of communism, but rather the bankruptcy of its pay-as-you-go pension systems. Workers in continental European countries are passengers on a pension Titanic. According to the OECD, the implicit pension debt of European pay-as-you-go systems is massive: 360 percent of GDP in France, 330 in Germany, 320 in Italy, and 200 in Spain. The sharp increase in life expectancy and the reduction in fertility rates are further compounding the viability of pay-as-you-go systems worldwide. As former U.S. Commerce Secretary Pete Peterson stated, "Global aging will become not only the most transcendent economic problem of the 21st century, but also the most important political problem."

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Drastic increases in worker taxes or reductions in pensions would be required to balance the finances of the pay-as-you-go system. This nightmare scenario acutely describes the nature of the coercion this may cause: "In 2050, to save money and free up precious workers, the German Bundestag will vote to abolish the bureaucracy that administers the pension system. From then on, each retiree will be assigned their own 'labor slave,' who will hand over half of their salary every month" (Stefan Theil, Newsweek, June 30, 2003). I foresee a severe conflict between a Europe with sustainable pension systems and one without them. In the first group will be countries with significant funded capitalization pension systems (the Netherlands, Denmark); those that have introduced, even partially, the Chilean capitalization system (Sweden, Poland, Slovakia); and those with solid public finances (Ireland, Luxembourg). In the second group will be the four largest countries in the eurozone: France, Germany, Italy, and Spain.

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Leaders in the Europe of massive pension liabilities could be forced to resort to the old Latin American recipe—that is, pressuring the European Central Bank in favor of monetary expansion that implies the devaluation of the euro, so that the resulting inflation reduces the purchasing power of pensions. Undoubtedly, the Europe with sustainable systems will strongly oppose this action. These conflicts will erupt within the ECB Council and will be difficult to resolve among sovereign nations. The underlying problem is that the pay-as-you-go pension system breaks the essential link between effort and reward, between contributions and benefits, destroying the right incentives and opening the door to political manipulation, evasion, and vested interests. Furthermore, by making it dependent on birth rates and life expectancy, it places it on the wrong side of 21st-century demographic reality toward lower fertility rates and population aging.

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The solution is the capitalized pension system: allowing workers to accumulate capital with their personal contributions in individual retirement savings accounts. This restores the essential link between effort and reward that is the basis of life itself. The Chilean capitalization system has become a model for the true pension revolution taking place in the world. In Chile, the individual capitalization system has meant the greatest creation of wealth for the direct benefit of workers in its entire history. Indeed, the capital generated by the system amounts to 250 billion dollars, and of that workers' capital, 72 percent (180 billion dollars) originates from the capitalization of contributions with compound interest and 28 percent is due to contributions themselves.

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This new paradigm created a modern capital market, raised the economic growth rate, and prevented the bankruptcy of the Chilean state. It also created a country of worker-owners, thereby weakening the engine of Marxist "class struggle" and helping to maintain the free-market economic model within a democracy. Klaus Schmidt-Hebbel, former chief economist of the OECD, maintains that "the number of countries with pension systems featuring individual savings has gone from 17 in 1999 to 51 in 2022. Pension assets managed by private companies (such as AFPs in Chile) in OECD countries have almost doubled in two decades, expressed as a percentage of GDP: from 59 percent in 2001 to 105 in 2021."

In the 1990s, several Latin American countries followed the path initiated by Chile. For example, in Mexico, accumulated old-age savings funds already equal 15 percent of GDP. Some 45.6 percent comes from the returns generated by the capitalization system (there called the Retirement Savings System), while 54.4 percent comes from contributions. Thanks to this reform, 60 million Mexican workers have become owners of real wealth by owning their retirement savings accounts.

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Following the fall of the Berlin Wall, almost all ex-communist countries introduced capitalization, albeit partially, into their pension systems. Two developed countries have already followed the Chilean model: Australia in 1992 (the "Superannuation") and Sweden in 2001. When Hong Kong introduced capitalization in 2000, China's process toward this system accelerated. Both President Clinton and President Bush became convinced of its logic and proposed initiating it in the United States.

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The radical drop in the fertility rate worldwide impacts in very different ways, depending on whether a country has a pay-as-you-go or a capitalization pension system. In the first case, raising the retirement age when the pension is paid by others is extremely difficult, and one only needs to look at what is happening in France. In a capitalization system, there are powerful incentives for individuals to voluntarily postpone their retirement age or find ways to increase their pension savings.

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We see rising on the horizon a world divided into countries with pay-as-you-go systems, in perpetual debt crisis, and countries with capitalization systems, which strengthen capital markets and growth. It is time, then, to abandon the Bismarck pension paradigm and create a new one, anchored in the ownership of old-age savings, individual freedom, and individual responsibility. As Victor Hugo wrote, "Nothing is more powerful than an idea whose time has come."