By Patrick Augustin, Sebastien Betermier, Emma Gormley & Marie Parent

The ALFI/McGill new study ‘Europe’s productive capital gap’ shows that Europe is falling behind in mobilising household and pension savings into productive investment compared to reformed pension economies such as Australia, Canada, and Sweden.

The study compares nine countries: four European economies with reformed, capital-based systems (Denmark, Finland, the Netherlands, and Sweden); two successful reformers outside Europe (Australia and Canada); and three major European economies still dominated by PAYG pensions (Germany, France, and Luxembourg).

Researchers find that countries that transitioned to partly funded pension regimes in the 1990s are now poster-child cases of successful reform, showing how gradual changes, compound interest, and equity-heavy investment strategies can dramatically scale up national pools of risk capital.

One key driver of this productive capital gap is the limited scale and depth of funded pension systems. In most European countries, household retirement wealth is concentrated in public pay-as-you-go (PAYG) social security systems, where pension contributions from active workers finance the pension benefits of retirees rather than being invested in financial markets. As a result, Europe’s funded pensions are smaller and allocate less to risky financial assets than those in leading pension markets.

Get the report here