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Blue Bust abroad
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.

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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  • Rodney

    Are you sure we have a Trust Fund? Aren’t the special T-bills that populate the Trust Fund nothing more than government I-owe-me’s, representing money borrowed by the government from the government and already spent on other things, to be paid for out of annual tax inflows and borrowing? If this is the case, we are in no better shape than Europe.

    • Andrew Allison

      Short answer: we’re in much better shape that Europe. Longer answer:

      • mgoodfel

        Don’t forget Medicare and Medicaid, which are more expensive than anything in Europe. And the Social Security Disability trust fund runs out this year. It will be interesting to see how they kick that one down the road.

        • Andrew Allison

          I didn’t; the subject was OASI [grin] Medicaid is a State-funded welfare program which receives subsides from all of us (aka Uncle Sugar), and should be regarded as such. Medicare is (despite its problems) an extraordinarily cost-effective health insurance program which puts private insurance to shame. It does, of course, face the same demographics issues as OASI. The level of fraud in SSD is monumental, and it may be that ending it and starting over is the best, albeit temporarily hard on the genuine beneficiaries, bet.

          • rjriediger

            Isn’t part of Medicare’s efficiency caused by it’s not having to spend money preventing fraud, the way private insurers have to?

          • Jim__L

            That’s an interesting definition of “efficiency”.

          • Nat Rev

            Hogwash. The total shortfall of SS and Medicare (not including Medicaid) is at least $72 Trillion – – and I’ve seen numbers approaching $120 Trillion.

            Medicaid may be “state funded” but given the perilous state of state budgets and deficits (CA is in for at least $1T for just teacher retirement) that shouldn’t make you warm and fuzzy. In Europe those costs are all borne by their central government so you really should throw in another $50T or so for the states.

          • Andrew Allison

            Please try and pay attention. The subject of this thread is the Social Security Trust Fund (a separate fund from Medicare), and it your comments that are hogwash.

          • Nat Rev

            Gosh Andrew, what a surprise. You’re a complete idiot.

            Economics do not exist is a vacuum which is the box of cat s*it you’re trying to sell. You’re late for a Feel the Bern meeting.

        • Andrew Allison

          I didn’t; the subject was Social Security pensions [grin] Medicaid is a State-funded welfare program which receives subsides from all of us (aka Unckle Sugar), and should be regarded as such. Medicare is (despite its problems) an extraordinarily cost-effective health insurance program which puts private insurance to shame. It does, of course, face the same demographics issues as The amount of fraud in SSD is monumental, and it may be that ending it and starting over is the best, albeit hard on the genuine beneficiaries, bet.

        • sukietawdry

          On our current trajectory, in 10 years healthcare costs will consume a third of our budget.

    • Kevin

      Agreed. However, as a practical matter it is impossible to have assets large enough to pay off future liabilities of this sort that aren’t in reality tied to the future performance of the economy. Unless we are stockpiling cans of soup we are depending on the future productivity of the economy to support this future consumption, whether it is paid from future taxes or the value of investments.

    • klgmac

      The SS Trust Fund is like the briefcase in the movie Dumb and Dumber. Full of IOU’s, payable to ourselves. The T Bills in the Fund are “Special Issue” and non marketable.

      • sukietawdry

        And interest-bearing.

        • klgmac

          So we are paying ourselves interest? On the money we owe ourselves. Everything is saved! BTW, Fed Reserve ZIRP and NIRP are punishing savers and crushing pension funds and insurance companies all sound the world.

          • Johan Rebel

            This article is uninformed.
            1. The Trust Funds in the USA are an accounting illusion: their asset is future tax irevenue.
            2. The problem is not that people are unwilling to save, but it is impossible to save if the currency is being inflated: savers are forced to invest in risky instruments.
            3. In Europe (and elsewhere) the situation is actually quite diverse. In some countries they rely more on (government mandated and supervised) private investment schemes whereas in other countries they rely more on current contributions. State pension schemes always fall into the second category.
            4. Many people think capitalized schemes are much better (they represent real saving and assets), but in a NIRP world there are no safe income bearing assets. So all pension schemes are in trouble, and are invested in speculative instruments more than ever before (stocks, junk bonds, derivatives, etc).
            5. The demographic bulge represents a huge unrealized problem for capitalized investment schemes: While people were saving they were all driving up the price of all assets together, but when they need those savings, the price of all these assets will be falling in real terms as they will all be selling together.
            6. People don’t actually save grain and stuff to consume in 60 years — and they don’t save money either. If everybody socked as much money into their mattress as they now put into pension schemes, physical cash would be depleted every two months. Pension funding has at bottom always been about continuity in the financial system and inter-generational solidarity: You need to eat grain that is being produced today.
            7. In a NIRP world, saving is futile: To earn 2/3 of the median income today, one would need $116 million of savings as opposed to $100,000 in 1979. (See for details)

    • pabloat8000

      Agreed. Only politicians and ignoramuses confuse debt with assets.

      • klgmac

        And cuts with increases.

  • Pete

    1. “State-funded pensions are at the heart of Europe’s social-welfare model, insulating people from extreme poverty in old age.” Wrong.
    Rather, European state-funded pensions insulating people from being responsible for their own wellbeing and future. The nanny state called to them, and Europeans came running into its embrace.

    2. This pension situation is why Merkel is gleefully importing hundreds of thousands muslim into Germany. The woman suffers under the mistaken belief that one arab = one German economically. Boy, will she be surprised.

    3. The only was Europe will get out from under their pension crisis is to repudiate a lot of the promises made. That will happen.

    • Andrew Allison

      Pete, how other than the fact that they’re not funded, do European state pensions differ from Social Security? Although it seems as though Merkel may have gone overboard, the problem facing all state-sponsored pension schemes (including ours) is the payer-to-payee ratio. Isn’t the real question whether jobs can be found for the immigrants? And hasn’t TAI been inveighing forever-and-a-day about the US pension promises that can’t possibly be kept? I guess what I’m saying is that we face the same demographic problem (which we appear to be addressing via a porous US-Mexican border) as Europe.

      • Tom

        We are facing it, just not with the same severity. Yet.

      • Fat_Man

        “other than the fact that they’re not funded, do European state pensions differ from Social Security?”

        Are you implying that Social Security is funded? It isn’t.

        All OASI & DI benefits are paid from current revenue from FICA taxes, the income tax on benefits, and interest on the “bonds” held in the “Trust Fund”.

        The “Trust Fund” is the cumulative amount by which revenue has exceeded expenditures. The annual surplus has been fairly large since the reforms (i.e. tax increases) of the 1980s. By 2007, the annual surplus had reached $190
        Billion. There is still an overall surplus and the “Trust Fund” has reached almost $2.8 Trillion. However, the annual surpluses have been declining, in 2014 it was a meager $25 Billion.

        Of particular concern, the DI fund has had a net payout since 2009, and its deficit in 2014 was about 50% of its ‘Trust Fund”. If trends do not change, the DI fund could be exhausted in short order.

        These numbers come from: “Annual Statistical Supplement, 2015” published by the Social Security Administration.

        CBO says: “Under current law, CBO projects, Social Security’s trust funds, considered together, will be exhausted in 2029. In that case, benefits in 2030 would need to be reduced by 29 percent
        from the scheduled amounts.”

        Note that the 2029 date represents a five year decrease in the estimates over the past decade or so. I.e., it is getting worse faster than we thought it would before the great Recession.

        The bonds held in the “Trust Fund” are simply statements that payments will have to be funded from general revenues when the proceeds of the payroll tax are insufficient to pay benefits. When the bonds have been exhausted, benefits must be cut or Congress must appropriate general revenues to cover the short fall. The debates will make my dotage very entertaining.

        • Andrew Allison

          Treasury Bonds held by the “Trust Fund” are, like any other government bond, payable from tax revenue or newly issued bonds. I suspect that we are in agreement that in the long run the US is going to default on its unsustainable debt, but unless/until that happens, Social Security remains funded (which is the subject of this debate). After 2029, the fund will be funded by dedicated tax revenue only, and pay an estimated 71% of the promised benefits. It will indeed be entertaining to see how Congress deals with that inescapable dilemma. My guess is increases in retirement age to reflect increased longevity, means testing, and stealth reduction in benefits via inflation.
          Fun factoid: when Social Security was introduced in 1935, life expectancy was significantly less than the retirement age (

          • Jim__L

            I really doubt we will “default”. I see two things happening, possibly over an extended period of time, possibly suddenly —

            1) We forgive the debts we owe to ourselves — the Treasury bonds held by the Fed will vanish in a puff of electrons.
            2) We retire the debts we owe to others by paying them back at face value — with freshly-printed dollars.

            What the actual value of those dollars will turn out to be is anyone’s guess.

          • Dave6034

            I’m sure retirees will all be very happy when the government’s debt to them, its promise to pay back the money it stole from their paychecks, is “forgiven”. Sort of like a government that takes your guns away, but it’s OK because they promise to protect you from bad guys.

          • Jim__L

            Government will just pay the retirees with money stolen from present-day workers’ paychecks.

            Kinda like they do now.

          • Fat_Man

            Re: Life expectancy in 1935:

            It is both true and irrelevant that the general life expectancy in the mid 1930s was less than 65.

            Here are life expectancies* at birth and at age 65 for the years 1929–31:
            0 — 59.2
            65 — 12.2

            And 1939–41:
            0 — 63.6
            65 — 12.8

            The relevant number for valuing the benefits paid by OASI was the expectancy at 65, when pay out began.

            And here the current numbers:
            Table 1. Life table for the total population: United States, 2011**

            0 78.7

            65 19.2
            66 18.4
            67 17.7
            68 16.9
            69 16.2
            70 15.5
            71 14.8
            72 14.1
            73 13.4
            74 12.7
            75 12.1

            Note that 65 is no longer the normal retirement age. It is now 66, and will increase to 67 in the mid 2020s. A benefit at age 75 would be back at that 12 year level, but it would also be accompanied by another 10 years of premiums and interest earnings. The actuarial balance point is probably more like 70. At 70 the remaining life expectancy is about 18% of the total expected life. In 1939, the life expectancy of a 65 year old was about 17% of his remaining life.

            **National Vital Statistics Reports
            Volume 64, Number 11 September 22, 2015
            United States Life Tables, 2011
            National Center for Health Statistics
            National Vital Statistics System

            *Life Insurers Fact Book 2015 — Chapter 12 Mortality

          • Andrew Allison

            Actually, it was extremely relevant. The problem facing Social Security is the number of years for which each beneficiary receives benefits.

          • Nat Rev

            In other words, there is no “trust fund.” Absent the bonds we would be paying SS out of current tax revenue (or new borrowing.) Instead, we will redeem the bonds from current tax revenue and pay SS. There is no difference.

          • Andrew Allison

            Wrong. The Social Security Trust Fund contains $2.6 trillion of investments in Treasury Bonds (~2/3) and interest bearing IOU’s from the General Fund. Try and grasp the difference between bonds bought and sold by SSA and issued by the Treasury. As detailed in various comments in this thread, starting cira 2029, the fund will be exhausted and reduced benefits will be paid from the dedicated Social Security Tax which, by law, Congress can’t touch (only revenue surpluses, which are a thing of the past, can be diverted). Congress could, of course change the law, but Social Security really is the third rail.

      • Fat_Man

        “I guess what I’m saying is that we face the same demographic problem (which we appear to be addressing via a porous US-Mexican border) as Europe.”

        If Europe thinks the Muslim hordes from MENA will bail them out. They will be rudely disabused of that notion.

        • Jim__L

          I suspect that they have few illusions of what that “bailing them out” will entail.

          The important illusion remains, though. European elites just don’t feel like returning to a motherhood-honoring culture. That’s going to destroy them.

        • Stacy Garvey

          People are interchangeable widgets. They don’t bring culture, habits, values with them. One economic widget is as valuable as the next. Replacing or supplementing one distinct ethnic group with another will workout well for Germany, Europe, and the US. So what if the replacement group originates from a place that has little history of property rights, rule of law, equality for women and gays? So what if they as a group have an IQ one standard deviation lower than the current group? So what if current stats are consistent their second generation children are not moving up the assimilation ladder into higher education and better paying jobs? Ms. Merkel, a childless women, has told us they can make it work so I’m sure they will.

      • Pete

        1.” …how other than the fact that they’re not funded, do European state pensions differ from Social Security?”

        That’s a pretty big ‘other,’ don’t you think?

        2. “Isn’t the real question whether jobs can be found for the immigrants?”

        No. Even if the GDP was all that was involved, the question would still be if the incoming arabs are capable of doing jobs that are needed — aside from janitorial services and waiting on tables. But it is more then a question of economics; massive influx of these muslims will change the nature & culture of Europe and it is this culture that has lead to europe (Western) prosperity.

        • Andrew Allison

          1. Yes, hence my opening salvo.
          2. I suggested that Merkel had gone overboard. I suspect Germany has been mislead by the success of the Northern European Gastarbeiter programs of the 1960s and 1970s. The outcome, as you suggest, is more likely to like the mess in France. The US has a long history of dealing with influxes of unskilled labor, and despite all the noise seems to be managing the current one reasonably well. Time will tell.

          • Jim__L

            I think that a lot of Trump supporters would dispute how “reasonably well” we’re doing on assimilating the new influx of unskilled labor.

            That said, I suspect Trump’s bile against immigrants was more true of Cologne’s recent rape-and-theft party than anything that’s happened in the US.

          • Andrew Allison

            “The Latino population is relatively young, with a median age of about 29, while the aging white population has a median age of 45. State demographers project Latinos will account for about 49% of Californians by 2060. [..] A young Latino workforce helps the economy by backfilling retiring baby boomers, said John Malson, the chief demographer for the state finance department.”

          • Stacy Garvey

            And how’s that demographic shift working out for California?

          • Andrew Allison

            Time will tell. There are certainly problems associated with the influx, but just as previous waves of immigrants found work and sent their kids to schools, the tide is rising. It appears to me that Hispanics are indeed in-filling for the Baby Boon retires and those leaving the State due to it’s nonsensical government. I’m seeing a lot of semi-skilled positions, and even skilled ones being filled.

          • Dave6034

            According to Victor Davis Hanson, California farms cannot function because their equipment is constantly being stolen by Hispanics. Nor can you run any sort of retail, restaurant, or service business because your Hispanic competitors sell out of a truck, pay no sales, payroll, or property taxes, and ignore regulations that are rigorously enforced against white-owned businesses.

          • Stacy Garvey

            I’m confident time already has told. But, as the saying goes, on a long enough event horizon we’re all dead.

  • Beauceron

    Luckily for Europe, they also have a much more liberal attitude towards euthanasia.

    I could certainly see a time coming where pensioners are encouraged to off themselves “for the good of the state.”

    It should be lovely. And with billions needed to fund the…let’s call them “new Europeans”… there should be some really fun times ahead for Europe.

    • Andrew Allison

      I think we should be careful about confusing euthanasia with the right to a dignified death. I realize that this is a contentious issue, but speaking for myself, I’d prefer a self-chosen graceful exit to the alternative.

      • Fat_Man

        Logan’s Run.

        • RDJ

          Yeah, at my age it’s more likely to be Logan’s Waddle. Or possibly if I can still afford Stoli, Logan’s Stagger.

      • Jim__L

        “A self-chosen exit” lacks grace. Take it as it comes, it will come at the proper time.

        • Andrew Allison

          I respect your beliefs, but beg to differ. Advances in medicine make the “proper time” indeterminate. If the circumstances arose, I’d prefer a graceful exit.

          • Jim__L

            I hope you consider that true grace lies in submitting to the inevitable instead of hastening or postponing it.

            Human agency should not be a cause of death. It’s too easy for ethics to become indeterminate then.

          • Andrew Allison

            I’m relieved to learn that true grace lies in not postponing the inevitable (nobody escapes alive) [grin]. Without wishing to be argumentative, what about free will? Recall that this discussion began with my suggestion that we should not confuse human agency (euthanasia) with self-determination.

          • rjriediger

            I suspect that euthenasia is like political correctness. People figure out what is forbidden speech so they self-censor, and the old & infirm realize they are a burden to others and so opt for a dignified exit.

  • Fat_Man

    The underlying lesson here is very grim. The existence of social insurance programs undermines the incentive to provide for old age by saving. There are very few boomers who have saved up enough money to retire on in the absence of social security. The coming generations, lumbered by student debts and excessive housing prices will be even more strapped.

    But, wait it gets worse. in pre modern societies, old folks without savings, had to rely on their children to take care of them. It was a strong incentive to raise children. Social insurance snaps the direct link between raising children and being cared for in old age. The result is that people stop raising enough children to maintain the population. Every country in Europe, and several in Asia are facing the prospect of the next generation being smaller than the current generation which will make it harder for them to care for the elderly, by working and paying taxes.

    There are obvious reforms. Replace social insurance with forced savings plans. Create programs that will force the elderly to subsidize the young, by eliminating student debt, and reducing the price of houses. Just because they are obvious, does not mean they will be adopted.

    • Jim__L

      The irony here is that SOMEONE’S children are going to be taking care of you no matter what. Growing your food, maintaining your house, changing your colostomy bag, whatever — once you’re too old to do it yourself, someone’s kids are going to be doing it for you. There is in essence *no difference* between “pre-modern” societies and modern ones — just a difference in implementation.

      For all those who didn’t pitch in to make those kids exist, frankly they’re rent-collecting off of the people who sacrificed and worked to have children. The system allows this. It probably shouldn’t.

      So, there’s really no reason for norms regarding family (and motherhood, and fatherhood) to have changed. The real question is, will these norms be re-asserted in time to save Western Civilization?

      • Stacy Garvey

        It’s probably a bad idea to rely on the kindness of another person’s child to care for you in old age without significant financial incentives. Even with significant savings a childless person needs a responsible individual to supervise their care least they get abused and ripped-off. It’s not just a difference in implementation. Love, affection, loyalty matter. Anyone with a parent in a nursing facility will tell you this. I see a coming tragedy of childless seniors hopelessly dependent on an indifferent state and state employees.

        • Jim__L

          I agree, there are so many advantages to having your own kids taking care of you in our old age, it is qualitatively better. It’s just that anyone who thinks that savings, government programs, or anything else in the end amounts to anything other than relying on someone’s kids, is missing the bigger picture.

          • Dave6034

            I have children because the alternative is entrusting my old age to a minimum-wage employee whose entire education was memorizing a list of evil things my people did to her people.

  • D B

    You think we have actual “money” in a “trust fund”?
    What we have is a file cabinet full of Treasury-issued securities. When the “trust fund” wants to cash those in, how do you suppose the Treasury is going to pay them off?
    There is no spoon.

  • Even the tame actuaries say the alleged ‘Trust Fund’ hits zero in twelve years. At 51, I see this as a crucial inflection point.

  • alboalt

    I can’t wait until those Islamic migrants in Germany and Sweden and elswhere in Western Europe start going to work and realize that they’re going to have to pay massive taxes to support the comfortable retirement of the decadent white Christians and atheists they despise.

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