Europe’s Pension Reckoning Approaches

Winter is coming for the blue social model in Europe as well the United States. Today’s Wall Street Journal offers a bracing look at the tenuousness of government pension guarantees in countries across the Continent, from Spain to Germany to Poland:

State-funded pensions are at the heart of Europe’s social-welfare model, insulating people from extreme poverty in old age. Most European countries have set aside almost nothing to pay these benefits, simply funding them each year out of tax revenue. Now, European countries face a demographic tsunami, in the form of a growing mismatch between low birthrates and high longevity, for which few are prepared.

Europe’s population of pensioners, already the largest in the world, continues to grow. Looking at Europeans 65 or older who aren’t working, there are 42 for every 100 workers, and this will rise to 65 per 100 by 2060, the European Union’s data agency says. By comparison, the U.S. has 24 nonworking people 65 or over per 100 workers, says the Bureau of Labor Statistics, which doesn’t have a projection for 2060.

The WSJ notes that the challenges facing America’s Social Security system, while significant, don’t compare to Europe’s dramatic pension shortfall. While the U.S. still has a Social Security trust fund of $2.8 trillion, most European nations have no money set aside, instead financing their pensions out of annual tax inflows. A closer comparison on this side of the Atlantic would be our state and local pension guarantees for public employees. These systems are underfunded to the tune of $2 trillion dollars, and politicians have offered few if any ideas for making up the difference.

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DYI Comments:  Money set aside??  That money has been all been spent since the very first day Social Security was put into place.  These are nothing more than bogus IOU's (non marketable securities) that can only be redeemed through the U.S. Treasury Department.  Where will the Treasury Department obtain the funds to pay for these securities?  They will go into the Treasury auction market and borrow the money!  As long as the bid to cover ratio stays acceptable the Fed's will not need to step in and digitally print.

Between defense needs, interest on the existing debt, upcoming Medicare costs, and exploding Social Security for ageing Boomers DYI anticipates the 2020's being a decade of high taxes, high inflation, and a labor shortage(Boomers exiting the workforce).

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The global decline of the blue model stands to inflict even more pain on Europe than on the United States. Europeans are worse at making babies than the United States, worse at integrating immigrants, worse at saving money to pay boomer retirement bills—but no worse at making promises to voters that they will be unable to keep. In the meantime, Europe’s challenges are complicated by an unfinished and perhaps impossible federal project, an acute migrant crisis, and an ongoing military conflict to its East. How and whether the Continent will be able to dig itself out of its pension hole is one of the great questions of the next generation.  

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Europeans are worse at making babies than the United States.  Correct!  The U.S. Fertility Rate is most definitely higher in the States as compared to the EU. However our fertility rate which is below replacement places inter- generational spending programs into jeopardy.  Social Security along with Medicare will increase the age to when you can receive benefits.  In the Netherlands, the Dutch have pushed their retirement age up to age 67.  However, there is very serious debate of moving the age up to 71 for those just entering the work force!  This will have to be addressed here in the States, spreading out and lowering the costs placed on future generations.

Country	2004	2005	2006	2007	2008	2009	2010	2013	2014

EU           1.48

1.47

1.47

1.5

1.5

1.51

1.58

1.59

1.6

Country	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
United States	2.06	2.06	2.07	2.07	2.07	2.08	2.09	2.09	2.1	2.05	2.06	2.06	2.06	2.06	2.01

Worse at integrating immigrants(Europeans).  We haven't been perfect, not by a long shot, but compared to the Europeans with the latest botched affair dealing with the Syrian refugees.  I'll leave it at that!   

Worse at saving money to pay boomer retirement bills.  Social Security dollars have all been spent beginning the day Franklin Roosevelt signed the bill into law. The excess dollars went into non marketable securities that can only be redeemed by the Treasury Department.  So....After purchasing these securities what happened to those dollars.  You got it!  They spent the money!  Since the year 2009 there is no longer any excess(it is in deficit) so all present Social Security taxes go directly to its participants.

The Social Security Trust Fund Myth

Our political leaders continue a long tradition of using words to describe Social Security that give you an impression that is different from reality. Normally, when you hear the words "trust fund," you think of an arrangement where money and investments have been set aside that are dedicated to a specific purpose, such as providing retirement benefits. And typically, the money and investments in a trust fund are separate from the entity that sponsors the trust fund. The trust funds supporting your 401k and pension benefits operate this way. 

But the Social Security "trust fund" is invested in special government bonds issued by the federal government. Principal and interest on these bonds must be repaid by future generations, according to law. The bonds in the Social Security trust fund are counted both as an asset of the trust fund and as a liability, since they are part of the total federal debt. Basically, one hand of the government owes the other hand, and the investments in the "trust fund" are not separate from the entity that sponsors the trust fund.

But no worse at making promises to voters that they will be unable to keep. Absolutely!  Promises, promises, the clarion call for politicians.  If the square off is between Trump and Clinton and if she gets behind in the polls expect promises to the moon, to any group she believes stupid enough to vote for her pandering.

DYI