Europe is in Worse Shape than We Are

How many times have you heard that European countries spend half of what we spend and get as good or better results? How many Commonwealth Fund reports have you read, describing how health care is so much better everywhere else? Then there's that awful World Health Organization (WHO) report, which ranks the US health care system almost dead last — at least among the civilized nations.

Ah, but before you become too green with envy, read this latest National Center for Policy Analysis report. When you combine health care for everybody with an aging population and health costs rising at twice the rate of growth of income and you run the whole system like a giant ponzi scheme… well… look out!

For the benefit of our American readers, today we offer a bit of possible schadenfreude. Catastrophically bad as our unfunded entitlement liabilities are, in other developed countries things are even worse.


An American in Paris

The study by Cato Institute scholar Jagadeesh Gokhale concludes that Europe is headed toward generational warfare. Paying benefits already promised means ever-increasing taxes on younger workers; but keeping taxes at current levels will require continued benefit cuts for retirees. As in the U.S., most of Europe's health and pension expenses for the elderly are funded on a pay-as-you-go basis. With few exceptions, no resources are set aside and invested each year in order to pay future expenses. As a result, all European countries have large unfunded liabilities — the difference between the projected cost of government social welfare programs and expected tax revenues. The cash flow problem created by these liabilities will grow over time. In general:

  • The average EU country would need to have more than four times (434 percent) 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.
  • At the low end, Spain would need to have almost two and one-half times (244 percent) its annual GDP invested.
  • At the high end, Poland would need to have 15 times its GDP invested forever!

Unless they reform their health and social welfare programs, EU countries will have to meet these unfunded obligations by increasing their tax burdens, as the benefit obligations come due. Although spending averages 40 percent of GDP today,

  • By 2020, the average EU country will need to raise the tax rate to 55 percent of national income to pay promised benefits.
  • By 2050, the average EU country will need more than 60 percent of its GDP to fulfill its obligations.

Comments (24)

Trackback URL | Comments RSS Feed

  1. Vicki says:

    Thanks for the Gene Kelly clip. Great pairing.

  2. Stephen C. says:

    Maybe Commonwealth will put out a report on the joys of living with a 60% tax rate.

  3. Larry C. says:

    Maybe the Europeans will be a little less smug in criticizing our health care system in the future.

  4. Bret says:

    Great news, John. We can stop feeling inferior. Of course, some people will insist on feeling inferior anyway. More power to them.

  5. Bob says:

    Given birth rates, much of Europes “young workers” will be Muslim. a large percentage of whom are already on the entitlements, and a significant number of whom will be militant Islamists. They are unlikely to want to work extra hard to support old kuffirs.

    Anyone interested in the demographics should read Mark Steyn’s book “America Alone.”

  6. Jim says:

    The more disturbing question I’m left with is whether a 21st century democracy is capable of creating a fiacally sound set of social welfare programs that does not cannibalize its economy in the long-run. Let’s pray that the inflated expectations of the sons and daughters of the “greatest generation” are a historical annomaly!

  7. John Baden says:


    This is remarkable! While arithmetic and demography are not optional, paying heed and anticipating consequences is.

    This is why your work is so important. Thanks for doing it.

  8. Dave Racer says:

    Greatly indebted to you. Thanks for this great work.

  9. suvarov says:

    >The more disturbing question I’m left with is whether a 21st century democracy is capable of creating a fiacally sound set of social welfare programs that does not cannibalize its economy in the long-run.

    Clearly the answer to that question is NO.

    So let’s keep the democracy bit and toss overboard the social welfare bit. That should keep us afloat.

  10. Uwe Reinhardt says:

    Thank you, John, for this blog, which opened my eyes. Let me confess that I have not given much thought to the problems of people living in, say, year infinity minus 10 (that is 10 year before infinity is reached); but evidently I should and I will, starting today.

    Now, these people in year infinity-minus-10 will jointly produce a GDP (plus the gazillion of valuable goods and services not counted in GDP). As is well known, the GDP is in reality a pie-shaped object resembling a cake. That GDP cake will be cut by the infinity-minus-ten-yearsers into slices which are distributed among the contemporaries living then.

    One section of the pie will be given to the then living young who are yet too young to work. And another slice will be given to those too old to work.

    What grates on me this that we, who live many gazillion before these infinity-minus-10 yearsers, can do so little to dictate to them exactly where they should put the knife to cut their GDP cake, even if now we dearly wanted to do so, as evidently you do, John. So I worry, with you, that the elderly in year infinity-minus-10 might get more than we, you and I, John, now wish them to have.

    Alas, just how future generations will slice up their GDP cake will be dictated by these peoples’ own social ethics, not yours and mine. For all we know, in year infinity-minus-10 there will be an as yet unknown religion under which the elderly are to be worshipped–as they still are in Asia sometimes– so that the then young will give them a much bigger piece of the cake than you and I deem proper. Or there might then be a religion under which anyone too old to work will be put on an ice floe, which might come closer to our tastes. But we can’t do anything about that.

    The most we can do now is to determine how, for the next few decades (only), the transfer of the cake pieces is to be effected.

    One approach is to take money away from the working young in the future, via taxes, and give that money to the then non-working elderly. With that money, the elderly can then claim cake-slice that future generations believe they should have. As noted, that decision will be driven by their, and not our, social social ethic and form of government.

    An alternative would be to do away now, for the next few decades, the tax-and-transfer mechanism and to effect the entire cake transfer by means of money accumulated via private contracts.

    Thus, we would save now and invest it now in income yielding assets we would tap for money in the future, when we are retired. To do this fairly and properly, we should not transfer to the now young and future young any assets for free — such as airports, roads, bridges, etc., and even the human capital pasted on the skeleton of our children. Look at all the stuff we give future workers fort free!

    Instead, we should charge them for all of it and have them pay us back in the form of royalties in IP, rentals on structures and equipment, and interest and dividends if we invest indirectly in assets through securities. All public schools and universities would be privatized and owned by us in this way. The kids would have to pay us back all the money we spent on their education, plus interest thereon.

    Alas, while we can dictate to ourselves to run such a savings and investment program, but we cannot even with our laws today force workers in, say, 2040 to do what we decided to do today. They might change the laws — especially in year infinity-minus-188. That is the real bummer, John, don’t you agree?

    I take it that you like the second alternative better, John. You’re concerned not so much with how future generations slice up the GDP cake they’ll bake — because no one will ask for your opinion how the then living generationsd want to do this. You just think it’s more aesthetically appealing to transfer money to us future retirees in the form of royalties, rentals, interest and dividends for renting to future working populations all of the assets we now put in place (including, as noted, the human capital grafted on our kids’ sceletons on our dime). We now pass on to our kids far too many of these assets for nothing instead of forcing future working people to pay us for them, don’t you think?

    When all is said and done, though, I am not sure why I should lose all that much sleep over it exactly how to effect the future money transfers from here to infinity, or even for generations living in years infinity-minus-, say, 1000.

    I do worry more about our troops in Afghanistan and whether or not they get paid well enough, equipped well enough or get decent health care. I also worry about the waitress and her kids now who must make do without health insurance.

    May I be forgiven for this myopia.

    Be well!


  11. alex says:

    The difference is not just cost, it’s also quality. In Italy you have universal coverage but if you need something FAST, unless your life is immediately in peril, you usually have to turn elsewhere than the National Health Service. So, it turns out that we pay twice: first out of our exhorbitant taxes and second, for whatever we can’t wait weeks or months for.

  12. Richard Walker says:

    Professor Reinhardt’s defense of ponzi schemes is the best I’ve ever seen. Bernie Madoff ought to call him as an expert witness.

  13. Devon Herrick says:

    News flash: income doesn’t come in a pie. It’s earned by real people. And when parasites try to plunder it the people who earn it resist.

  14. Bart says:

    The purpose of calculating liabilities into perpetuity is not to micromanage future generations’ affairs, it is to keep from unfairly painting future generations into a corner in a way that would take away their ability to manage their own affairs.

  15. Bart says:

    P.S. I do agree, since Earth is expected to become uninhabitable in something less than a billion years, that literally planning for infinity is probably overkill.

  16. Uwe Reinhardt says:

    Note to Devon Herrick:

    Income is a monetary claim on GDP. GDP is real stuff. The altter comes in a pie-shaped layer cake.

    Note to Bart:

    Good point. Someone should have told it to Ronaldf Reagan and George W. Bush, both addicted to deficit financing.

    I made a distinction between a transfer of real GDP — real stuff — and the money used to effect that transfer. One way to put that m oney into the hands of the elderly is tax-and-transfer (pay as you go). The alternative is through private savings and investments.

    In principle, future generations are free to reneg on the promises we have made by way of Social security. Private corporations do it all the time in connection with promised retiree health benefits. So far government has not, but in principle future generations can reneg on promised Social Security benefits. It may not be honorable, but it is no less honorable than what private corporations have already been doing.

    If instead of Social Security we used private savings and investments (private pensions), private bankers can easily reduce the money claims future retirees have through the kind of mismanagement we have witnessed in recent years. Ask 64 or 68 year old Americans how good they feel about their private pension or 401(k) plans.

    To bottom line is that future generations do control their own destiny. They are free to manage their own affairs.

  17. Bart says:

    Uwe, I suppose you’re right in that future generations will have the choice of which year to default on Social Security benefits, and whether to do it gradually or all at once.

    I just wish they’d reneg on these ridiculous super-COLA adjustments until the system is in some sort of actuarial balance. Without that it’s hard to picture any other reform making much difference.

  18. John Goodman says:

    What’s missing from this discussion:

    1. We are encouraging young people to believe that when they retire, Social Security & Medicare & Medicaid are going to be there for them and so they do not need to save for those contingencies without also telling them that these benefits will require astronomical tax rates to be paid by people not yet born — who never agreed to be part of this chain letter.

    2. We are going to leave our grandchildren with a horrible dilemma: put the elderly on the ice or live in poverty in order to pay all their promised beneifts — without any assurance that when they retire their granchildren will pay even higher tax rates on their behelf. All because of choices made by irresponsible people who will be dead and buried long before the crisis emerges.

  19. Bart says:

    No argument here. When obligations are allowed to compound at a rate higher than inflation and population growth can support, no level of taxation will be sufficient to prevent eventual collapse.

  20. Uwe Reinhardt says:

    What a great day February 12th 2009 was! John Goodman and I agreed on something — vaguely. Either he’s mellowing or I am slouching toward Attila the Hun. Go figure.

    Here’s where John and I agree: Missing from the debate over assuring the nation’s elderly a standard of living that we and future generations might consider ethically acceptable is the challenge of goading a basically myopic population into prudent and economically optimal life cycle planning. (More on “economically optimal further on.)

    I can accept John’s thesis that the anticipated presence of Medicare, Medicaid and Social Security can seduce a population afflicted by myopia into imprudent life styles during their working years. Marty Feldstein has almost made that claim. Staunch Liberals have laughed it off. But I lean more to Marty’s views, because I believe (but cannot prove) that in the absence of these public programs private households would set aside more of their income into savings (as is the case in Asia, for example.)

    Singapore has sought to overcome the human frailty called myopia with a government mandated Provide Fund. Under that law, all working people must set aside X% of income into a fund that covers pensions, health care under a regime of Medical Savings Accounts and so on(I thin it is 40%, but am not sure).

    So John, in my view, does put his finger on a serious problem, one that can leave our nation with inadequate capital per worker.

    But surely readers of your blog would agree that Ronald Reagan did not help matters in this regard when he discovered the beauty of deficit financing, driving up our public debt from $ trillion at the start of his presidency to about $4 trillion. Clinton did eventually turn the annual federal deficit into a surplus (after 1994 with the help of a Republican majority in Congress). But George Bush was totally deficit addicted. In effect, he behaved like a corporate CEO who sold mountains of debt (bonds) every year to pay shareholders mountain-sized dividends, the tax cuts. Unfortunately, these huge tax cuts in 2001 and 2003 did not increase the fraction of business investment in GDP; that fraction fell sharply. Investment in residential real estate, on the other hand, rose sharply. But do larger houses make workers more productive on the job? Or is it computers and non-congested roads?

    So I must ask you who worry about the taxes our entitlement programs load onto future generations when Reagan and Bush II loaded so much debt onto the federal government’s balance sheet in their reigns?

    Furthermore, John, while the anticipated presence of these entitlement programs (Medicaid, medicare, Social Security) may well entice people into prudent life styles, the socially and economically irresponsible behavior of a largely unregulated Wall Street does not help either. Workers have seen the private savings they had painstakingly accumulated in privately managed retirement funds decimated — often cut in half. Do you think that encourages savings? Don’t you think the misallocation of investible funds by Wall Street (and, of course, the monstrosities called Freddie Mac and Fanny Mae) also will leave our chiuldren and grandchildren with a horrible dilemma along, of course, with people who are, say, 70 years old now and saw their retirement income cut in half by private asset managers?

    I think we’ll have a world wide rethinking of this entire issue — retirement income — and will have to send out of the room simplistic thinkers on the right and on the left.

    The question is (1) how well or poorly, in real terms, current and future retirees should life, especially the porest among them) and (2) what we today can do to assure current and future retirees to attain the standard of living we thing they should have.

    The simple cheer-leading and sloaganeering I so often see on your blog, John, just won’t do it. One literally has to switch on the cerebrum on this issue, painful as that may be for some folks on both the left and the right.

    As to the “economically optimal” life cycle planning, I would refer you to the literature on on the Golden Rule of economic growth, which osught to discover national savings ratios which, in steady state growth, would allow the highest time path of consumption per capita. Nobel Laureate Edmund Phelps was one of the leading lights in that lierature, as was James Tobin. I don’t think it is much taught anymore.



  21. John Goodman says:

    “simple cheer-leading and sloganeering”? I thought I was producing perceptive, witty, nonpareil commentary.

  22. Linda Gorman says:

    To be optimal and applied in the real world, the Golden Rule of economic growth requires a) finding the savings propensity that maximizes steady state consumption per capita into infinity and b)that God is available to do the calculation.

    Only four problems here. First, relatively few people would agree that giving everyone an equal consumption share, regardless of his contributions, is just. Second, people maximize utility, not consumption. Third, the Solow model emphasizes steady-state consumption. People do not appear to choose steady state consumption over their lifetimes. Finally, advances in public choice theory assure us that government is not synonymous with God.

    People involved in the health care debate would also be wise to recall that government run health care is not synonymous with God either. Government run health care routinely makes choices that maximize the utility of those in government while failing the individuals forced to rely on it for medical care.

  23. Bill Boyles says:

    I was looking for questions to ask the Health Ministers Roundtable at World Congress in May. This looks like a good addition to the list. The question is: what will they do about it?

    Most likely they will treat technology like drugs, with a national “formulary” for devices. Another probability is more negotiated national fee schedules like in Switzerland.

    I still think we are worst off though, since we have a much bigger problem with overcapitalization. Market solutions could have meant rational market allocation of medical capital, but now it’s too late. Hospital bond ratings for example would be much lower if subjected to market pressure. Oversupply-induced demand will rise as 25 million are added to the pool with SCHIP + Medicaid + exchanges.

    Europe is grossly overregulated, but that’s easier to fix than being overcapitalized like the US.

  24. John R. Graham says:

    I reviewed George Schultz and John Shoven’s book about entitlement reform, “Putting our House in Order”, in the latest Claremont Review of Books, and thought they had great insight. Of course, there is much good work at NCPA on these issues, too. What we are seeing in Canada and the U.S, at least, is pushing the cliff’s edge out a few millimeters every year by increasing marginal taxe rates on high-income earning seniors, through means-tested Medicare Part B premiums (and soon Part D premiums) and “clawing back” Canada Pension Plan payments for “affluent” retired Canucks. (I wrote about means-testing Medicare at