A Look into the Future

The Telegraph reported that the the UK recently announced its plans to increase the "pension age" (the British version of Social Security) to 70 years old. This is in an attempt to bring the national debt back down to 40% of GDP. The US national debt is currently at 79% of GDP! To do this the British government would have to raise the tax rate by 15% on top of the already high tax rate imposed on the British public. According to the National Institute of Economic and Social Research the tax rate will still have to be increased by roughly 8% even with the age increase. This does not take into account the bloated pension payments that will be necessary when an aging population reaches retirement age, or the fact that the UK is continually accepting immigrants that tend to subscribe the the overgenerous European welfare system. The UK government has one more option, curb spending. This option is political suicide for any European politician who dares to state the need to cut government spending, and therefore government programs. Europeans are very attached to their benefits and are reluctant to give them up, even if said benefits are stifling economic growth.

What this means for the US
Because of the fact that our national debt is considerably higher than most other developed nations we will have to make these same decisions eventually. The US seems to be leaning toward more government funded programs and higher taxation. Even if the taxes are differed and these programs are paid for with new debt, taxpayers will eventually have to foot the bill. The downside of financing these programs with debt is the fact that this debt will be added to our already astronomical outstanding debt, and new taxes will eventually have to cover the programs and the associated interest payments. Using Greece as an example, the "old-age dependency ratio" or the number of workers compared to the number of retired people is currently at 3. By 2050 it will be 1.6 according to the Bank of Greece. More importantly pension payments are expected to rise from 12.4% of GDP in 2005 (already a huge figure) to 22.6% of GDP in 2050. This does not take into account government funded health care, welfare, or other outrageously high government expenditures.

If we continue to follow the path we are on we will inevitably be stuck in the same situation many European governments are ignoring. Any rational person can see that without major reform in Europe this situation is not likely to end well. Overall even an extremely conservative estimate would put total Greek government payouts at 35% of GDP in 2050. If this is the case the taxes associated with these payments will cause most businesses to leave Greece for less fiscally restrictive countries, thus starting a domino effect of tax increases and lost commerce (assuming no one will lend to a country paying out 1/3 to 1/2 of its GDP in government benefits). Greece's Eurozone neighbors are not likely to have the capital to bail out their fellow EU member due to the fact that most will be dealing with similar problems of their own.

If we continue to follow the path that so many European nations have walked down not only will we be setting ourselves up for failure, but we will increase our tax rate and national debt significantly. This model is not sustainable and will therefore have to be reformed in the future, forcing people who paid into the system when they were young to loose all their "guaranteed" benefits when they grow older. If governments refuse to reform their social systems, the required payments threaten to topple what is left of the free market system where such generous programs exist, including here.