"This May Be The End Of Europe As We Know It": The Pension Storm Is Coming

Authored by John Mauldin via MauldinEconomics.com,

I’ve written a lot about US public pension funds lately. Many of them are underfunded and will never be able to pay workers the promised benefits - at least without dumping a huge and unwelcome bill on taxpayers.

And since taxpayers are generally voters, it’s not at all clear they will pay that bill.

Readers outside the US might have felt safe reading those stories. There go those Americans again… However, if you live outside the US, your country may be more like ours than you think.

This week the spotlight will be on Europe.

The UK Is Headed to a Retirement Implosion

The UK now has a $4 trillion retirement savings shortfall, which is projected to rise 4% a year and reach $33 trillion by 2050.

This in a country whose total GDP is $3 trillion. That means the shortfall is already bigger than the entire economy, and even if inflation is modest, the situation is going to get worse.

Plus, these figures are based mostly on calculations made before the UK left the European Union. Brexit is a major economic shift that could certainly change the retirement outlook. Whether it would change it for better or worse, we don’t yet know.

A 2015 OECD study found workers in the developed world could expect governmental programs to replace on average 63% of their working-age incomes. Not so bad. But in the UK that figure is only 38%, the lowest in all OECD countries.

This means UK workers must either build larger personal savings or severely tighten their belts when they retire. Working past retirement age is another choice, but it could put younger workers out of the job market.

UK retirees have had a kind of safety valve: the ability to retire in EU countries with lower living costs. Depending how Brexit negotiations go, that option could disappear.

Turning next to the Green Isle, 80% of the Irish who have pensions don’t think they will have sufficient income in retirement, and 47% don’t even have pensions. I think you would find similar statistics throughout much of Europe.

A report this summer from the International Longevity Centre suggested that younger workers in the UK need to save 18% of their annual earnings in order to have an “adequate” retirement income.

But no such thing will happen, so the UK is heading toward a retirement implosion that could be at least as damaging as the US’s.

The Swiss Are No Different Despite the Prudence

Americans often have romanticized views of Switzerland. They think it’s the land of fiscal discipline, among other things. To some extent that’s true, but Switzerland has its share of problems too. The national pension plan there has been running deficits as the population grows older.

Earlier this month, Swiss voters rejected a pension reform plan that would have strengthened the system by raising women’s retirement age from 64 to 65 and raising taxes and required worker contributions.

From what I can see, these were fairly minor changes, but the plan still went down in flames as 52.7% of voters said no.

Voters around the globe generally want to have their cake and eat it, too. We demand generous benefits but don’t like the price tags that come with them. The Swiss, despite their fiscally prudent reputation, appear to be not so different from the rest of us.

This outcome in Switzerland captures the attitude of the entire developed world. Compromise is always difficult. Both politicians and voters ignore the long-term problems they know are coming and think no further ahead than the next election

Switzerland and the UK have mandatory retirement pre-funding with private management and modest public safety nets, as do Denmark, the Netherlands, Sweden, Poland, and Hungary.

Not that all of these countries don’t have problems, but even with their problems, these European nations are far better off than some others.

France, Belgium, Germany, Austria, Spain Are in Deep Trouble

The European nations noted above have nowhere near the crisis potential that the next group does: France, Belgium, Germany, Austria, and Spain.

They are all pay-as-you-go countries (PAYG). That means they have nothing saved in the public coffers for future pension obligations, and the money has to come out of the general budget each year.

The crisis for these countries is quite predictable, because the number of retirees is growing even as the number of workers paying into the national coffers is falling.

Let’s look at some details.

Spain was hit hard in the financial crisis but has bounced back more vigorously than some of its Mediterranean peers did, such as Greece. That’s also true of its national pension plan, which actually had a surplus until recently.

Unfortunately, the government chose to “borrow” some of that surplus for other purposes, and it will soon turn into a sizable deficit.

Just as in the US, Spain’s program is called Social Security, but in fact it is neither social nor secure. Both the US and Spanish governments have raided supposedly sacrosanct retirement schemes, and both allow their governments to use those savings for whatever the political winds favor.

The Spanish reserve fund at one time had €66 billion and is now estimated to be completely depleted by the end of this year or early in 2018. The cause? There are 1.1 million more pensioners than there were just 10 years ago. And as the Baby Boom generation retires, there will be even more pensioners and fewer workers to support them.

A 25% unemployment rate among younger workers doesn’t help contributions to the system, either.

Overall, public pension plans in the pay-as-you-go countries would now replace about 60% of retirees’ salaries. Plus, several of these countries let people retire at less than 60 years old. In most countries, fewer than 25% of workers contribute to pension plans. That rate would have to double in the next 30 years to make programs sustainable.

Sell that to younger workers.

The Wall Street Journal recently did a rather bleak report on public pension funds in Europe. Quoting:

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. (WSJ)

While the WSJ story focuses on Poland and the difficulties facing retirees there, the graphs and data in the story make clear the increasingly tenuous situation across much of Europe.

And unlike most European financial problems, this isn’t a north-south issue. Austria and Slovenia face the most difficult demographic challenges, right along with Greece. Greece, like Poland, has seen a lot of its young people leave for other parts of the world.

This next chart compares the share of Europe’s population that 65 years and older to the rest of the regions of the world and then to the share of population of workers between 20 and 64. These are ugly numbers.

Source: WSJ

The WSJ continues:

Across Europe, the birthrate has fallen 40% since the 1960s to around 1.5 children per woman, according to the United Nations. In that time, life expectancies have risen to roughly 80 from 69.

In Poland birthrates are even lower, and here the demographic disconnect is compounded by emigration. Taking advantage of the EU’s freedom of movement, many Polish youth of working age flock to the West, especially London, in search of higher pay. A paper published by the country’s central bank forecasts that by 2030, a quarter of Polish women and a fifth of Polish men will be 70 or older.

Source: WSJ

This Coming Crisis Is Beyond the Power of Politicians

I could go on on reviewing the retirement problems in other countries, but I hope you begin to see the big picture. This crisis isn’t purely a result of faulty politics - though that’s a big contributor.

It’s a problem that is far bigger than even the most disciplined, future-focused governments and businesses can easily handle.

Worse, generations of politicians have convinced the public that their entitlements are guaranteed. Many politicians actually believe it themselves. They’ve made promises they aren’t able to keep and are letting others arrange their lives based on the assumption that the impossible will happen. It won’t.

How do we get out of this jam?

We’re all going to make big adjustments. If the longevity breakthroughs that I expect to happen do so soon (as in the next 10–15 years), we may be able to adjust with minimal pain. We’ll work longer years, and retirement will be shorter, but it will be better because we’ll be healthier.

That’s the best-case outcome, and I think we have a fair chance of seeing it, but not without a lot of social and political travail. How we get through that process may be the most important question we face.

Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.


Luc X. Ifer eforce Sat, 10/07/2017 - 23:41 Permalink

The problem is the people of today define their life by non essential, ephemeral pseudo-values instead of essentials, proven core values needed for safe & prosperous survival. Highly recommended, this episode of the Black Mirror SF series - Nosedive, an eye opener - a scary one, into our reality and near future owned by the lords of the internet & social media http://www.imdb.com/title/tt5497778/

In reply to by eforce

root superuser eforce Sun, 10/08/2017 - 02:46 Permalink

This wouldnt remove the problem it would merely shift it. Our pension systems need perpetual growth in order to work. European system needs perpetual growth of population and American system needs perpetual growth of value of assets which in turn also requires perpetual population growth. This shit was doomed to implosion no matter and muh free markets cant solve this.

In reply to by eforce

To Hell In A H… eforce Sun, 10/08/2017 - 08:49 Permalink

Fuck half the cunts upvoting you. If halfwits like you place the blame squarely at the feet of socialism, then you are a fool. I'd lay most of the blame at capitalism, driving down wages to such a degree, that it has forced families(mum and dad) to become 2 income earners, to live a reasonable lifestyle. Come circa 2017: 2 income households for working class people, struggle to make ends meet, thus the reason for delaying having children.  I hear youngsters saying this regularly and many of them are middle class. I grew up in the UK, on the cusp/change of dad being the sole bread-winner/working and mum staying at home looking after kids, to seeing my mum going back to work as a nurse part time, and this was in the late 70's. Efficiency, driving down costs, productivity and keeping inflation under control, was Capitalism/Reaganism/Thatcherism. Half the blame lays right there, because wages haven't kept up with inflation.

In reply to by eforce

Justin Case eforce Sun, 10/08/2017 - 11:56 Permalink

Remove socialism. <-- nothing to do with it.Gov't took money from workers pay cheques. There was no option to opt out of this ponzi scheme. The Gov't took yoar earnings and used the money to hide their mismanagement of the economy. They took other people's money to fill the financial void created by over spending. This is simply a misappropriation of other people's money. It wasn't put aside for the intended purpose that it was taken for. Remove pension deduction so people will not have expectations of recieving any of the money that was taken forcefully from your pay cheque.SOCIALISM: A theory or system of social organization in which the means of production and distribution of goods are owned and controlled collectively or by the government.  <--- That is not the case in merica currently.It's called growing collectivism.Collectivism will always eventually destroy the economy of any nation, no matter how great it may be.Current example - VenezuelaWhenever the standard of living for the majority of citizens drops significantly in a jurisdiction, the voters will be ripe for empty promises. In every such case, collectivism will appear to be the best solution.Collectivism is by its very nature is a parasitical system that creates nothing. It therefore will always eventually destroy the economy of any nation where it is implemented, no matter how great that nation may be. The only uncertainty is the number of years required for destruction.Today, we’re witnessing the collapse of the primary jurisdictions of the former “free” world. They’re operating on a quasi-capitalist system that has been eroded by repeated injections of collectivism (primarily socialism and fascism). Increasingly, voters in each of these jurisdictions are becoming convinced that the promises made by collectivist candidates “just make sense.” As the system continues to spiral downward, as it inevitably will, the scales are likely to tip, not in the direction of a return to the free market, but in the direction of full-on collectivism.

In reply to by eforce

hllnwlz Five Star Sun, 10/08/2017 - 11:50 Permalink

Oh, so this is what happens when you flood the world in liquidity so that housing costs 10x income.  The kids realize they can't make a go of it and fuck off for greener pastures where they DO NOT contribute tax revenue to the unfunded liabilities run up by out of control power hungry bureaucrats who will promise the fucking world to the free shit army, including pensioners and the other kids who realize there's no fucking point like so many have in Japan. All these asset-holding assholes who thought they were rich are gonna find out the hard way that you can't put the same "dreams" out of reach of your kids and expect them to sign up for bondage of an indeterminate length to fund the lifestyles to which you have become accustomed. The law of unintended consequences strikes hard, motherfuckers.  

In reply to by Five Star

Endgame Napoleon 07564111 Sun, 10/08/2017 - 08:59 Permalink

If it is a ponzi, we need the moms to stay at home and take care of the elderly people along with their children, as they did in past eras, letting their husbands work in the paid economy, rather than taking a $10-per-hour office job that would not even cover their rent were it not for the unearned income from a husband, a child support check or the free rent / free groceries / monthly cash from gov’t / free electricity and $6,269 refundable child tax credit allocated to single moms who do not pay income tax. Those moms have cradle-to-grave socialism—all through their childbearing years and all through their old age.

With Fake Feminism among other trends, we have created a society where a national retirement fund is necessary, especially with wealth so concentrated due, again, to women in the workforce. The few decent-paying jobs that could support a household and allow retirement savings are in the hands of fewer people due to assortative mating.

While small business and the struggling self-employed 1099 contractoers contribute on every penny they earn and at twice the rate — a little over 15%, as opposed to a little over 7.5% — many “employed” people are not contributing to SS at all or are contributing only on a fraction of their income, including illegal immigrants who often work under-the-table while collecting billions in welfare and child tax credits each year and wealthy people who only pay into the Social Security fund up to the $127,200 cap.

It is true that they have raised the cap multiple times since I started researching it on the internet, but in that same time span, wages have not gone up beyond a minuscule amount that would not spare $5 per month for retirement savings, and wealth continues to stay extremely concentrated at the top.

In reply to by 07564111

Justin Case Endgame Napoleon Sun, 10/08/2017 - 12:08 Permalink

we need the moms to stay at homeThat used to be the case, but Gov't brainwashed the herd with the women's movement in the sixties to be equal and all that bullshit to get women to make them work. Sitting at home didn't generate any tax dollars for the Gov't. They just wanted moar tax payers, not the bullshit women were sold. So now we let other people bring up yoar kids. Those people give a rat's ass how yoar kids morals and behaviors develop. The stay home parent was the key to bringing up a child with the family standards and care for their development. 

In reply to by Endgame Napoleon

lucitanian TheLastTrump Sun, 10/08/2017 - 11:44 Permalink

Your not kidding!"We’ll work longer years, and retirement will be shorter, but it will be better because we’ll be healthier."Ever tried to get a job in Portugal at 66 years old, even with 40 years of a successful business management background. And yes, I agree, there is no reason I should take the place of a younger person in this environment. They are far better qualified to face the cut and thrust of these times. They are without skepticism or fatalist defeatism looking forward at the inevitable economic and financial catastrophe facing the world in the near future. No, wisdom and experience has no input value when it comes to thinking-up the next app or financing its development. Perhaps wisdom and common sense will be useful commodities when they have to build a new vegetable garden to feed their kids.The generation that paid into national pension schemes have been suckered and now will be sacrificed to the interests of the powerful elite who they were foolish enough to trust once.

In reply to by TheLastTrump

Justin Case lucitanian Sun, 10/08/2017 - 12:15 Permalink

the powerful elite stole that money forcefully of the working class. You will see poverty grow as the younger working class will be burdened with their aging parents b/c the Gov't squandered the pension money they collected from them. The economy will continue to contract as disposable incomes drop and wages don't keep up with the cost of living.According to CNN, one in every four Medicare dollars spent goes to the five percent of beneficiaries in the last year of their life. The upshot of this is often crippling debt for the families of terminally ill patients, with the care of a single individual at the end of their life costing an estimated $39,000. For 40 percent of households, the bill exceeds their financial assets. End-of-life care is often brutal, nasty, traumatic, and very expensive, putting patients through long stretches of unnecessary suffering just to give them an extra month or two. And when the terminally ill patient undergoing these nasty, expensive treatments has repeatedly insisted that they’d rather be dead, you have to start wondering who all this expenditure is really benefiting. 

In reply to by lucitanian

Crazy Or Not Hkan Sun, 10/08/2017 - 05:48 Permalink

The Grey Tsunami approaches...ZH'ers may remember the voting average age of UK is soon over 50!Known to big a big contributor to Brexit. Similar Germany.Hence Merkels repopulation with young working age Muslim citizens.As I've noted elsewhere shortly to be followed by EU Patriot Act.We're on the tail end of democracy  - we'll beg for the return of these times in 6 years+!

In reply to by Hkan

Mena Arkansas Sat, 10/07/2017 - 22:21 Permalink

Don't worry, the rapefugees will pay your pensions.Oh, that's right. They have no skills and will be sponging off the welfare state when not busy raping your daughters and/or sons.I'm sure they won't mind when you run out of fiat to support their lifestyle.No reason to think they will turn feral when the gibs give out.

Paul Kersey Sat, 10/07/2017 - 22:22 Permalink

Central banks have no trouble pumping trillions of dollars, created out of thin air, into insolvent too big to fail banks, in order to enrich the casino gambling banksters and to keep the bond holding class from losing money. But pensioners are just middle class folk, so there will be no trillion dollar bailouts for them.

dogballs Paul Kersey Sun, 10/08/2017 - 08:59 Permalink

Yes the central banks could have taken the newly printed money and developed new infrastructure for energy systems, existing infrastructure upgrades, covering the pension programs, mitigating healthcare costs, etc. Instead the greedy bastards inflated the mother of all bubbles and pocketed the proceeds. Looking forward to pitchforkings and hangings.

In reply to by Paul Kersey

OverTheHedge Deplorable Sun, 10/08/2017 - 00:36 Permalink

The Greek pension model works quite well:  most pensioners have seen a 60% reduction, at least, and quite a lot of them manage on €300 a month. See, no need to worry.The good news about pensioners is that they are mostly too old to riot, and they mostly are too old to present a big challenge if they do riot. Nothing to worry about.

In reply to by Deplorable

To Hell In A H… OverTheHedge Sun, 10/08/2017 - 10:36 Permalink

The old bags have the vote and routinely hold governments to ransom. In England, we call them "THE GREY VOTE" and they are to be seriously feared.It was partly this demographic that gave the UK conservatives, what we Brits love to called a bloody black eye. Pensioners love the pension and receive tax breaks, so much so that when the UK conservative party advocated the DEMENTIA TAX, the forecast of a landslide victory for the conservatives, soon turned into a fucking hung parliament. Just Google UK dementia tax and read for yourself. Every UK political party panders to the grey vote. Even contemplating reforming the UK winter fuel allowance, a payment made so the old bags won't freeze in winter, is a guarantee for MP's in a swing constituency, to lose their seat in the election.  The UK labour party promised pensioners and students unfunded jam today and jam tomorrow and nearly won the election.

In reply to by OverTheHedge