[...]Waiting For Something To Turn Up: Europe’s Looming Pensions-based Sovereign Debt Crisis | afoe | A Fistful of Euros | European Opinion[...]…

I think Perplexed is right, and Edward here is wrong. They’ve got this myth in the US too:

http://www.cbpp.org/cms/index.cfm?fa=view&id=3104

All these debt numbers like “875 percent of its gross domestic product” are what will theoretically have to be paid over several decades, not one year (I mean this should be obvious, just do a quick sanity check on these numbers: why would any country have to pay hundreds of percent of GDP on pensions, unless it was over decades? How much do you think pensions are?).

This was a very basic error Edward.

While the situation of public finances is between dire and awful in most places, it is inexact to add pension costs woes to the already overlong list of problems, at least for France (I don’t feel knowledgeable enough on Spain and Greece to comment on their specific case).

This bizarre concept of ‘unfunded pension liabilities’ has been floated around for some time from a far away, specific location of the political spectrum. As the objective of the Cato institute seems to be to make the editorial staff of The Economist look like Bolsheviks, perhaps we should use their output with some amount of caution. Furthermore, barking at the wrong retirement tree allows the collapsing of the surrounding forest to remain unnoticed.

Consider a fictive country, that we shall name the Un. St. of Am., where the government plans to spend 3 % of GDP each year for Defence budget in the next 50 years. 3 % of GDP, 50 years – and voilà ! My Cato-tonic magic wand has just created a 150 % of unfounded liabilities. The Cato institute might not be amused and point out that Defence budget of the Un. St. of Am. for year 20xx shall be financed by tax revenue of said year 20xx. Well, it is exactly the same thing for French pensions.

The répartition system of French pensions makes worker pay, from deduction on their salary, for the pensions of retired. The system has thus three outputs: the amount of working people, the amount of retired, and the amount transferred from the first to the second. Thus there are 3 dependent variables to adjust: the age of retirement (or, in France, its proxy, see below), the amount of tax paid by workers, and the level of the pensions.

This system is extremely slow-moving. Low-frequency changes come from demography and can be predicted 20 years in advance, with economic up and downs adding some unpredictable amount of noise. Thus it is extremely easy to perform small trajectory corrections that over time have a huge effect.

Accordingly, while health care system (Assurance Maladie) has been a recurrent financial nightmare for the last 30 years in France, the pension system has had none of these problems. In 2000 Insee predicted that some serious adjustments (read: painful changes in some of the 3 variables) would be needed by 2020-2030 to compensate for the aging of the population. With the French demography of the last ten years, Insee now says that it’s about fine until 2050. Thus over the last years there have been regular, incremental increases of the durĂ©e de cotisation to compensate for the regular, incremental aging of the population (the French government didn’t touch the symbolic 60 years retirement age, but moved up the number of years (or, more specifically, trimesters), that people need to work in order to claim a full pension. This kolossal finesse seems to have mystified workers and economic commentators alike). Thus, the total work period in people life will increase with life expectation, which is normal and logical. People might also prefer to work until 75 and die at 95 than to work until 60 and die at 80.

The French retirement system is sound, will not collapse overnight, and will certainly not ask unexpectedly for a bailout. It is therefore better behaved than the American financial system that is close to the heart of the Cato Institute. What is true for France is also probably true for Germany, where the 3 variables will, however, have to be adjusted a bit more than in France to address the effects of the poor demography.

Meanwhile, the parts of the blogosphère that correctly predicted the financial troubles of the last 3 years seem to indicate that we are due for an encore. Look at the situation of the alternative retirement system, capitalisation – ie retirement funds. Bloated until 2007 by stock market speculation, these funds have started to collapse. In the US, more and more cities, counties and states realize they soon won’t have the money to pay the (public sector) pensioners anymore. Some think of bankrupcy to break their contractual obligations. The courts will have to decide. If the stock market falls, again, by 50 %, what will happen to these public sector retirement funds? What will happen, more generally, to the private retirement funds?

A lot of retirement funds, from public and private sectors alike, have been lured into underfunding and overpromising by the stratospheric returns of the Ponzi financial years. Maybe the Cato Institute could ruminate some conclusions on the effect of the ongoing financial crisis on such schemes. Whether they do or not, we will find out. Fast.

Another point. The US military budget is financed by considerable boowing right now. But everybody obsesses about the Social Security system, that is in surplus now and could perhaps run a deficit in ten years. (If you ignore the trust fund).

And no, military spending does causes hidden liabilities: Military spending and war now after is causing spending for the VA for decades to come.

The pay as you go system in germany has survived two world wars and two great inflations. You can’t say the same for capital based retirements systems. Especially during this crisis. And this projections about level of debt in 2060 if unchecked are always a bit silly. Who can really project the growth rate of healthcare costs this far out?

But I am more astonished with your obsession about spanish public finances. The worry about the UK, France, Greece and so on I can understand. Looking at the year 2007 as last per crisis year the budgets of thia countries were in deficit during good economic times. If a country can not balance it’s budget during years of growth there is reason to worry.
But in Spain the budget was balanced in 2007 and the debt per gdp only 40% or so. The current public deficits have been caused by the economic crisis. Isn’t that the problem and the public deficit only a symptom?