The Changing Nature of Work Demands a Rethink of Pension Systems

By Mika Horelli, Brussels   

I recently spoke with a seventy-something lawyer who candidly admitted he could never afford to stop working. Retirement simply wasn’t an option because, as he put it, “I guess I just forgot to take care of my pension when I should have.” There was always some excuse to postpone dealing with it.

In the Western world, we often take pensions for granted—a safety net awaiting us in old age, regardless of the paths our lives have taken. In reality, this assumption is far from accurate.

While the lawyer I met may have been at fault for his situation, this is not always the case. Our pension systems were designed for a bygone era of stable, long-term employment. Today’s labor markets have changed radically. Increasingly, people are engaged in non-standard, short-term contracts that demand far more individual responsibility to secure social protection and retirement savings than traditional salaried jobs ever did. This shift underscores the urgent need to overhaul pension systems to reflect the realities of modern work.

Beyond Freelancers and the Gig Economy

This issue isn’t confined to artists, freelancers, or gig economy workers such as food delivery drivers, though they are emblematic of this new reality. The scope is far broader than that.

Take, for example, private practice doctors or lawyers. Risks associated with inadequate retirement savings are rarely linked to such professions. Similarly, thousands of construction workers, engineers, and architects who work on a project-by-project basis or as subcontractors face similar challenges. Even tech entrepreneurs who pour all their resources into building their companies without a fallback plan can find themselves in precarious situations.

Non-standard employment—including part-time work, fixed-term contracts, and agency work—has risen significantly across Europe over the past two decades. While some workers voluntarily choose such arrangements for flexibility, many take them out of necessity, as full-time jobs are increasingly scarce.

More frequently, people are pushed into non-standard employment involuntarily. Employers are increasingly shifting workers into de facto self-employment to cut costs and transfer financial responsibilities—such as social security and retirement contributions—onto employees. 

This trend has made precarious employment the new normal in many industries.

The Blind Spots of Pension Systems

One of the biggest contributors to inadequate retirement security is the status of the self-employed and entrepreneurs. In many countries, these individuals are responsible for managing their own retirement savings, with no mandatory pension contributions akin to those required of salaried workers. Without careful planning, they risk reaching retirement age with little to no savings. For instance, in Finland, self-employed workers’ pension contributions are based on self-declared income, which many set far too low, resulting in negligible pension accrual.

Another vulnerable group comprises those in non-standard employment. Part-time, temporary, and freelance contracts often yield insufficient income, which in turn limits pension accrual. Women are disproportionately affected, as they frequently bear greater family responsibilities and work irregular schedules. This is reflected in pension statistics: women tend to have significantly smaller pensions than men.

Then there are those who have been financially dependent on a spouse or family member. When the breadwinner dies or leaves—through divorce, for example—the dependent individual may be left with no income or insufficient retirement security. While many countries offer survivor’s pensions and other forms of support, these often fall short of covering living expenses.

The Unpredictability of Markets

Some people meticulously plan for retirement by investing in capital markets or other vehicles. They’re told that long-term investing is a smart way to prepare for the future. However, financial crises—such as the 2008 global recession—have demonstrated how fragile such savings can be. The value of investments can plummet overnight, wiping out years of diligent savings.

Take the collapse of Enron in 2001, which devastated countless ordinary employees and investors who had entrusted their retirement funds to the company’s stock. Similarly, the 2008 failure of Lehman Brothers left many investors empty-handed. In Europe, the 2020 economic crisis took a toll on shareholders of companies like Thomas Cook, where ordinary investors suffered severe losses when the travel giant collapsed.

Diverging Approaches: America vs. Europe

American and European philosophies on pensions differ significantly. In the United States, where I lived more than a decade, the system heavily relies on individual savings and private investments. Public social security provides only a basic safety net, leaving workers to bear the bulk of the responsibility for their retirement income. This is exemplified by the 401(k) system, where employees direct part of their wages into investments. While this grants individuals more control, it also exposes them to significant risks, including market volatility and economic downturns.

In Europe, pensions are predominantly managed through public systems funded by mandatory contributions from employers and employees. This structure generally ensures more predictable and stable retirement security but leaves less room for individual flexibility. Many European countries aim to guarantee retirees’ livelihoods through collective systems, though these are increasingly strained by aging populations and shrinking worker-to-retiree ratios.

These contrasting systems shape financial behaviors. Americans often grapple with the uncertainty of their investments’ returns, while Europeans are more dependent on government decisions and the sustainability of public pension schemes.

A common issue across both systems is a lack of understanding about how pensions work. Many delay saving for retirement until it’s too late. Among younger generations, retirement feels distant, making it easy to neglect. This problem is pervasive in both Europe and the U.S. Financial literacy is low, and saving for retirement often takes a backseat to immediate expenses and life’s demands.

A Shared Responsibility

Despite what some proponents of individualism might claim, ensuring adequate pensions is not solely an individual responsibility. It is also a societal obligation. Allowing a portion of the population to face financial insecurity in old age creates deep divides in society. Economic instability doesn’t just harm individuals; it has far-reaching consequences for societal well-being and cohesion.

A robust discussion on the future of pensions is long overdue. We must acknowledge the shortcomings of current systems and seek ways to ensure that everyone has the opportunity to enjoy a secure and dignified retirement. This is not just an economic challenge—it is a moral imperative.