Money And Change

"This May Be The End Of Europe As We Know It": The Pension Storm Is Coming
ZeroHedge.com      Oct 7, 2017 10:15 PM
 
Authored by John Mauldin via MauldinEconomics.com,
 
John Mauldin wrote 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. 

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. 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.
 
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.

 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.

The Trouble With Taxes
ZeroHedge.com       Oct 7, 2017 4:15 PM
 
Authored by Valentin Schmid via The Epoch Times

Can we imagine a world without them?
 
“There is no more persistent and influential faith in the world today than the faith in government spending,” wrote economist Henry Hazlitt in 1946. If that was the case then, what about today? Nearly every problem in the world calls for the government to solve it. In return for these services, the government needs money—a lot of money.
The federal government of the United States alone is on track to spend $3.65 trillion in the fiscal year of 2017, or 21.5 percent of gross domestic product.
 
Now, the Trump administration has been in the news for proposing a reform of the tax system, including some significant cuts. However,rather than bicker over the costs and effectiveness of that particular proposal, let’s take a step back and look at the big picture on taxes. We may even consider asking the question of whether we need taxation at all.
 
In 2017, we are immersed in taxes like a fish in water. We are so used to it, we could not even imagine a life without it. But the federal income tax only started in 1913, with a relatively modest 1 percent for the lowest bracket and 7 percent for the highest bracket. Since then, it has been fluctuating, reaching a peak of 92 percent on the highest bracket in the 1950s—which nobody could afford to pay nor actually did pay—and currently stands at 39.6 percent for incomes of more than $411,000.
 
No Taxes
There are many arguments in favor of abolishing personal and corporate income taxes altogether.The first is that taxes prevent private economic activity, the core provider of employment and the products we need to sustain our lives. From a cost-income perspective, high corporate taxes make many business ventures not profitable, especially for small entrepreneurs and innovators. This is exacerbated by the fact that taxes artificially increase the risk-reward profile for any operation, regardless of profits. Taxes immediately reduce the profits, but losses can only be offset after a new profit is earned. This leads to less investment and lower employment because entrepreneurs have to factor in the higher risk and lower savings to buffer for unforeseen circumstances.
 
“Improved machinery and better-equipped factories come into existence much more slowly than they otherwise would. The result in the long run is that consumers are prevented from getting better and cheaper products, and that real wages are held down,” wrote Hazlitt, in his classic book “Economics in One Lesson.”
 
The same principle is true for the employee who may choose not to invest to increase his skill-set and future income because of this skewed risk-reward profile.

Government Waste

The second important reason is that government is notoriously inefficient in providing the goods and services it promises to deliver better than the private sector could.
 
For example, looking at the different consumer price indices, virtually all sectors with heavy government involvement (health care, education, child care) have much exceeded the price increases in other sectors (automobile, clothing, cellphone service, electronics) and even average inflation.
 
Since the Affordable Care Act became law in 2010, for example, the consumer price index for medical care rose 19 percent against an increase in the general price level of 11 percent.
 
But some expenses are not reflected in the price increase. On top of the cost of the services produced by usually private companies like hospitals and colleges, every government program needs to pay for bureaucrats on top of elected politicians. In fiscal 2016, the federal government employed 2.2 million civilian workers and spent $215 billion in compensation alone for usually better wages and benefits than the private sector. The IRS cost $11.7 billion in fiscal 2016 and employed almost 80,000 people.
 
 So instead of two private parties meeting directly, the government inserts an unnecessary and costly bureaucracy in between. The government justifies this bureaucracy because someone must administer the money brought in through taxes and pay it out in subsidies and transfer payments.
 
Because the bureaucrats do not have perfect information about the needs of different individuals who are affected by these programs, they cannot know which amount or program suits whom, but rather offer one-size-fits-all solutions that lead to inefficiency.

In addition, since the bureaucrats are not handing out their own money and usually are not liable for mistakes made in disbursing the funds, the process inevitably leads to waste. And the private education and health care companies happily make use of this bad incentive structure by charging more than they could in a competitive marketplace. Add in a bit of corruption, and prices rise more than they should under normal conditions.

For those who think that less government involvement would inevitably lead to people dying in the streets because the health care system would collapse and nobody would be able to afford college education without the subsidies, consider the following:
 
First, these services would become much cheaper under a competitive system for the reasons cited above.
 
Second, imagine how many more resources every household would command if they didn’t have to pay federal income taxes.
 
If you add more opportunities for business and employment because of lower taxes, you may even be able to pay for health care and college without having to go into debt.
 
The same is true for retirement planning and private charity. Fewer taxes mean more resources for individuals and private charity organizations to take over.
 
And compared to 120 years ago when there was no welfare state and many people had to live in misery, our society may well be advanced enough now for the private sector to provide most if not all of government services like Social Security, Medicare, and Medicaid.

Rich Savers

If the government focused on essentials like providing infrastructure, security, and jurisprudence for private contracts, taxes could be much lower. But would the rich then become ever richer by not paying a heavy progressive tax?

In fact, history suggests the opposite, as most income inequality, which has more causes than just taxes, has arisen after the introduction of a heavy progressive tax system. In a system in which the government takes the backseat, the wealthy would have two choices about what they could do with their extra money. They could spend it, leading to increases in economic activity, which should benefit everyone. Of course, well-off people spend a lower proportion of their income on consumption because there is a limit on how much any one person can consume.
So they would be forced to save the rest. Normally, these type of savings would go into private capital markets, leading to an increase in investment, business activity, and employment.

Under the current regime, however, 10 to 20 percent of the U.S. household net worth of $96.2 trillion is invested in most of the $20 trillion worth of government debt, either directly or through various investment structures like pension funds. Foreigners hold around $6 trillion of U.S. government debt.

Even though interest rates are low at the moment, the average taxpayer is paying this interest for households who can afford to save and invest in government securities, although this includes many middle-class families as well. However, the relatively poorer taxpayer doesn’t have any savings, yet may not qualify for government transfer payments because he has a job. This person gets nothing in return, making his situation worse, not better.
So if the government kept a balanced budget by getting out of most non-essentials sectors, saving too would level the playing field.

Of course, reducing taxes to 1913 levels is completely against the incentives of politicians and bureaucrats whose bread and butter is to design and administer government programs that need funding. This is one of the reasons even President Donald Trump’s relatively modest tax proposal will take so long to pass.