While the eye of the bond-vigilante cyclops is currently focused on Greece’s debt there’s more than that to look out for, namely, future obligations, such as pensions. According to a Cato Institute study, were Greece to put the present value of its pension obligations on its balance sheets, its current debt would would swell from 116% of GDP to 875%.
This is not big news of course: many state-funded pension schemes, even in the U.S., have somewhat magical expectations of future financial returns.
The Cato study’s author, Jagadeesh Gokhale, writes that, in Europe, “large portions of their government budgets are funded on a pay-as-you-go basis. That means that no real resources are set aside and invested each year by government or individuals to prefund future expenditures on such programs. Spending on promised retirement and health-care benefits for the elderly will increase. But there will be fewer workers to pay benefits as the bills come due, and the growth of income from which to extract taxes to support these programs will slow. As a result, all European countries have large unfunded liabilities …
“In general: The average EU country would need to have more than four times (434%) its current annual gross domestic product (GDP) in the bank today, earning interest at the government’s borrowing rate, in order to fund current policies indefinitely. “
Not that the U.S. gets off scot-free. While government debt is equal to 83.6% of GDP, the present value of its Social Security and Medicare obligations equals 500% of GDP.
Curiously, there’s no mention of Canada. Then again, the Canadian system is different, with two government pillars: OAS and CPP, rather than a single state pension.