The true specter haunting Europe today is not communism but 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 enormous: 360% of GDP in France, 330% in Germany, 320% in Italy, and 200% in Spain.

 

The sharp increase in life expectancy and the decline in fertility rates are further aggravating the viability of pay-as-you-go systems worldwide. As former U.S. Secretary of Commerce 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.”

 

Drastic tax hikes on workers or pension cuts would be needed to balance the finances of the pay-as-you-go system. This nightmare scenario sharply describes the nature of the coercion it can 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 ‘labor slave,’ who will hand over half their salary every month” (Stefan Theil, Newsweek, June 30, 2003).

 

I foresee a serious conflict between a Europe with sustainable pension systems and one without them. In the first group will be countries with significant capitalization pension systems (Netherlands, Denmark); those that have introduced, albeit 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 eurozone countries: France, Germany, Italy, and Spain.

 

Leaders of the Europe with enormous pension liabilities could be forced to resort to the old Latin American recipe, that is, pressuring the European Central Bank (ECB) for monetary expansion that implies devaluation of the euro, so that the resulting inflation reduces the purchasing power of pensions. Undoubtedly, the Europe with sustainable systems will firmly oppose this action. These conflicts will erupt within the ECB council and will be difficult to resolve among sovereign nations.

 

The root problem is that the pay-as-you-go pension system breaks the essential link between effort and reward, between contributions and benefits, and that destroys the right incentives and opens 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 the 21st-century demographic reality of lower fertility rates and population aging.

 

The solution is the capitalization pension system: allowing workers to accumulate capital with their personal contributions, in retirement savings accounts. This restores the essential link between effort and reward that is the basis of life itself.

 

The Chilean capitalization system, created in 1980, has become a model for the true pension revolution that is occurring 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% ($180 billion dollars) originates from the capitalization of contributions with compound interest, and 28% is due to the contributions themselves.

 

This new paradigm created a modern capital market, raised the economic growth rate, and prevented bankruptcy for the Chilean state. It also created a country of worker-owners, thus weakening the engine of Marxist “class struggle” and helping to maintain the free-market economic model in democracy.

 

Klaus Schmidt-Hebbel, former chief economist of the OECD, states that “the number of countries that have pension systems with individual savings has gone from 17 in 1999 to 51 in 2022. Pension assets managed by private companies (like the AFPs in Chile) in OECD countries have nearly doubled in two decades, expressed as a percentage of GDP, from 59% in 2001 to 105% in 2021.”

 

In the 1990s, several Latin American countries followed the path started by Chile. For example, in Mexico, accumulated old-age savings funds already equal 15% of GDP. 45.6% comes from the returns of the capitalization system, while 54.4% from the contributions. Thanks to this reform, 60 million Mexican workers have become owners of real wealth by being owners of their retirement savings accounts.

 

After the fall of the Berlin Wall, almost all former communist countries introduced capitalization, albeit partial, 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, it accelerated the gradual transition of China toward this system. Both President Clinton and President Bush were convinced of its logic and proposed starting it in the United States.

 

The radical drop in the fertility rate worldwide impacts very differently, depending on whether the country has a pay-as-you-go or capitalization pension system. In the first case, raising the retirement age when the pension is paid by others is extremely difficult, and just look at what is happening in France. In a capitalization system, there are powerful incentives for, by individual decision, postponing the retirement age or seeking ways to increase pension savings.

 

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 economic growth.

 

It is time, then, for the whole world to abandon the Bismarck pension paradigm and embrace the capitalization system that is anchored in ownership of retirement savings, individual freedom, and personal responsibility. As Victor Hugo wrote, “Nothing is more powerful than an idea whose time has come”.