Mar 4th 2026|4 min read
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EUROPE is known as the “old continent” because it is not the “new world”. From ancient Greek democracy to classical music, it is the cradle of Western civilisation. These days a less charitable contrast is not with the new but with the young. The median citizen of the European Union is 45, six years senior to an equivalent American and four to a Chinese person. The EU already has fewer than three residents of working age for every pensioner.
Public spending on retirement benefits, health and long-term care for the elderly is equivalent to a fifth of the bloc’s GDP, and counting. Proposed cuts to pensions are invariably met with fierce opposition from ageing voters. Resources are diverted away from important investments in sectors like defence and infrastructure.
Pensions are, in other words, a huge economic liability for the EU. At the same time, however, they are a gigantic wasted opportunity. America’s pension funds manage $43trn in assets, equivalent to nearly 140% of GDP. In the EU as a whole, the figure is just over $5trn, less than 30% of GDP. Increasing it could do wonders for Europe’s stunted capital markets.
In many European countries, most pensions are furnished by public schemes and most of these are “pay-as-you-go”. Contributions are deducted from workers’ wages in the form of a payroll tax and used to finance payments to current pensioners. Precious little is invested. In Germany, France, Italy and Spain, these systems cover more than 90% of employees. They run up large deficits that governments must plug, from 2% of GDP in Germany to 6% of GDP in Italy, according to the Boston Consulting Group.
Some occupational schemes exist, where employees set aside part of their paycheques. But these are small and, because they often guarantee minimum payments, a lot of the proceeds are invested in safe government bonds. In the EU’s four biggest economies only about a fifth of the money in such schemes finds its way into capital markets. Individual pension plans (which tend to get favourable tax treatment) are similarly conservative—and often charge eye-watering fees which eat into already meagre returns.
Chart: The Economist
A few outliers show that things do not have to be this way. In proportion to GDP, Sweden’s pension assets are roughly as large as America’s. Those of the Netherlands and Denmark are higher (see chart). At least 20% of those three countries’ pension portfolios are invested in equities, with the rest mostly sitting in government bonds and other less racy assets. A lot of this equity capital flows to local businesses, which helps explain why the three countries have some of Europe’s most vibrant stockmarkets.
Some large Dutch occupational funds have around half their portfolios parked in European assets. The AP4, one of the funds that backs Sweden’s pay-as-you-go system, invests 15% in Swedish equities and 9% in Swedish bonds, partly to match assets with Swedish krona liabilities, and partly because of mandates that favour domestic investments. Although only between 5% and 10% of Danish funds’ equity holdings are domestic, this still leaves them disproportionately exposed to the local stockmarket, which accounts for just 0.5% of global market capitalisation.
Historically, investing an outsize slice of their portfolios at home prevented European pension funds from taking advantage of soaring stockmarkets elsewhere, especially in America. Now, though, the calculus is changing.
For one thing, European equities have outperformed American ones lately. Since the start of 2025 the STOXX 600 index of large European firms has risen by 36% in dollar terms, compared with 15% for the S&P 500, its transatlantic cousin. American companies are already richly valued relative to earnings, which may depress future returns, whereas many European ones still look relatively cheap. And European technology firms are at last coming into their own. This makes them more attractive investments for pension funds diversifying into venture capital and other alternative assets.
Reforming sclerotic pension systems in places like France and Germany to resemble those in Denmark, the Netherlands and Sweden is not going to be easy. But the prize is considerable. If all EU countries had pension assets worth 140% of GDP, the American figure, then these pots would hold nearly $30trn. If a quarter was invested in equities, reflecting the share in Danish, Dutch and Swedish funds, and a fifth of that stayed in Europe, the pool of capital available to European companies would grow by $1.5trn. By comparison, the current market capitalisation of STOXX 600 is $18trn. Europe would still be old. But at least it would be more spry. ■
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This article appeared in the Finance & economics section of the print edition under the headline “Oldies’ goodies”
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