European Social Welfare State Model Running Out of Time and Money
European leaders are facing an uphill battle to restore confidence in the euro, after a €750 billion ($1 trillion) “shock and awe” financial rescue package failed to quell market fears that the sovereign debt crisis in Greece may spread across the European Union and possibly unravel Europe’s single currency. Although European stocks and bonds briefly rallied after the bailout fund was announced on May 10, European markets have since erased those gains and the euro, which has become a key indicator of confidence in Europe’s economy, has fallen to a four-year low against the U.S. dollar.
A close examination of the EU bailout fund shows that it is actually only a short-term fix — it merely uses new debt to pay off old debt and does not change the fact that all European countries will remain top-heavy with unsustainable debt. German Chancellor Angela Merkel admits that the EU rescue plan will do nothing more than buy time and put off a painful day of reckoning. But fears are mounting that European authorities are running out of options to prevent a full-scale financial meltdown.
Europe’s debt crisis is now calling into question the economic viability of the European social welfare state itself. Indeed, the biggest unintended consequence of the crisis is that it has proved the economic foundation of Europe’s much-vaunted social model to be far more unstable than previously imagined.
All across the continent, countries large and small are straining under the weight of debt caused by comprehensive “cradle-to-grave” social welfare. At least four trends, some of which are unique to Europe, are conspiring to bring down the edifice of the European social welfare model. They are demographics, chronic unemployment, cultural idiosyncrasies, and profligate politicians.
What follows is a tiny selection of sundry data that sheds some light on why European public finances are in so much trouble:
Demographics: The birth rates in many European countries have fallen to below replacement levels at a time when life expectancy is increasing and populations are aging. As a result, ever-diminishing pools of workers are bearing the growing financial burden for swelling ranks of retirees, who in many cases collect pensions and draw on state health care until well into their 90s.
In Germany, for example, which is the largest country in the EU, the total population is forecast to drop 20 percent from about 82 million currently to approximately 65 million in 2060, according to the German Federal Statistics Office. At the same time, the average age of the German population is set to increase. Within the next five decades, for example, 34 percent of the population will be older than 65, up from 20 percent today.
Hence the number of pensioners that will have to be supported by working-age people in Germany will nearly double by 2060. While 100 workers provide the pensions for 34 retired people today, they will have to generate income for 67 pensioners in 2060.
In Greece, which has one of the lowest fertility rates of any country in Europe, the 65-and-over population has soared from just 11 percent in 1970 to 24 percent today, and is projected to grow to one-third of the population by 2050, according to the Hellenic Statistical Authority. By contrast, Greece’s working age population has reached its peak and is projected to decline 20 percent over the next 40 years. At the same time, Greece has one of the highest longevity rates in Europe — with an average life expectancy of 77.1 years for men and 81.9 for women.
In Spain, meanwhile, the government is trying to boost the country’s stubbornly low birth rate (which has been below the population replacement level for nearly two decades) by means of a €2,500 “baby check” that is designed to bribe couples into having children.
Chronic Unemployment: In most European countries, chronic unemployment and early retirement are two sides of the same coin. Early retirement essentially is a labor policy that artificially drives down the unemployment rate. The downside of early retirement is that it reduces the tax base while it increases the burden on the social security system, especially in the context of increased longevity.
In Spain, the government spent twice as much as it took in during 2009, with unemployment benefits (the unemployment rate is stuck at 20 percent, which translates into more than 5 million Spaniards on the dole) constituting the largest single component of government expenditures.
Good analysis, i agree fully.
One thing in the demographics is left out, which makes the situation even worse: those europeans who still get kids are oftentimes the dregs of society, people on state welfare without any education, the reason being that they get subsidies for having babies while for normal people with a job having a baby is a huge financial risk. So the demographics among “normal” people are even worse.
It’s actually going to be even worse than that. The question I’ve been thinking about lately is this: Why would all of the young professionals stick around?
I once moved my family out of a beloved house and a perfectly good neighborhood largely because all of the other similarly aged families were moving out. Maybe there was an original reason that the exodus started, and maybe there wasn’t. It didn’t matter, these things take on a life of their own. We didn’t even want to go, really, but the kids had no friends. So we left.
Eventually, the young people see the writing on the wall. There is a declining pool of people their age. Like farmboys watching everyone else leave to the big city, they eventually follow.
If I were an ambitious young European right now, I’d already be planning on emigrating to the U.S. or Australia.
The same can be said to a somewhat lesser degree here in the US. The rich and poor are best able to “afford” children. The rich obviously have the means but seldom have more than 2-3 children. The poor in the US have countless programs that in effect subsidize poverty by reducing the financial burden of having children without improving the family’s actual income. The poor have access to free medical care via SCHIP and Medicaid, free lunch and breakfast programs in public schools, free vaccinations, free prenatal care, subsidized housing, WIC, welfare, food stamps, free day care in some places, etc. Because we are so generous to the poor they aren’t forced to make the tough financial decisions we in the middle class are when it comes to deciding whether or not to have children. Why do you suppose there are a higher percentage of children in poverty than adults? Because the poor have more children. Why do they have more children? Why not. Ironically the Left also wants the federal government to pay for abortions for poor women who may not have gotten pregnant if not for the fact that the taxpayer picks up the tab.
Some of these comments border on fascist – you people assume that ‘acquiring wealth’ is the same as ‘creating value’. This is a false assertion. The wealthiest people in America pay less effective tax rate than the hardest working. The financial managers that bet your money (they ‘print’ it from the entity that controls monetary policy) – pay only capital gains. Fund managers income is even taxed like capital gain. While commercial and retail banking – and even some trading – is necessary and healthy – most of it is gambling (value neutral) – but they risk the entire worlds ecomony (therefore value destroying). CEO’s now earn 300x labour wages, when only 20 years ago that figure was only 30x. The rich pay most of the taxes because they have geared the system to reward them. Sure – they worked hard to get there – but the thief who sold the painting from the Musee D’Orsay is probably very smart and worked hard for it as well – his hard work is irrelevant.
THE major institutionalized problem is not ‘welfare’ – in fact, very, very few people are on welfare and social programs. The issues are A) a social power imbalance that disproportionately rewards wealth B) healthcare costs driven by drug company and insurance monopolies C) financial risk taking with public funds (causes a meltdown every 10 years).
The current fiscal imbalances are not as drastic as they seem. If you change the retirement age a little bit – they change drasictally. Because politicians don’t have the balls to do it – and need a crisis to get the will – our political system is basically designed to fail our budget! For example, if we changed the retirement age to ’5 years before average lifespan’ – then it would be moved up every year. If retirement funds were kept attached to the individual, ie you only draw what you get in plus or minus a little bit, we wouldn’t have this problem.
The budget crises are only social crises so long as the parameters like retirement etc. stay fixed and they won’t.
Again – the real problems are power imbalance, healthcare costs, financial system monopoly over public funds. The social security/retirement problem can be fixed with the stroke of a pen. Items 1, 2 and 3 will require a revolution.
Well, I guess it is the end of the line, komrads. What we are now witnessing is the glorious sovereign bankruptcy of the people.
Great column. I’m trying to be sympathetic about it all, but it is difficult since Europeans have largely been devouring three hot, steaming bowls of Schadenfreude daily vis à vis America’s much smaller entitlement programmes for the past few decades. Truth be told, I never thought it would collapse so soon. I was expecting it to at least last until a few years after the real retirement boom starts to put real pressure on Europe’s remaining workforce in the coming decade.
A couple of things that I could add to your list that represent a massive drain on productivity in Germany are not only early retirement, but also a very delayed entry into the labour market and pernicious underemployment. In Germany, it is not uncommon to start work around 25 – 27. Since hiring and firing is hampered by miles of red tape, many young people fresh out of university or one of the German apprenticeship programmes may have to complete a couple of years of additional poorly paid internships. Many Germans never draw their first real wages until they are in their thirties. In practical terms, this is the equivalent of a lost decade of wages. Additionally, even though unemployment is a major issue in Germany, they do not really have a concept of “underemployment.” The term “Unterbeschäftigung” exists, but very few people know exactly what it is. Due to the inflexibility of the labour markets, many people are forced to languish in poorly paid positions for years that they may be overqualified for but unable to advance as they could in the US. This is particularly true of people with degrees that they earned outside of Germany.
I always enjoy your columns.
It must have been 20 years ago that I read an article in the Economist discussing this very prospect. Prediction trumps debate every time, because events settle the argument. In this case the argument is essentially mathematical, hence inescapable.
Strange how often the predictable arrives as a surprise.
John Frary @3 “Strange how often the predictable arrives as a surprise”
John Frary @3 “Strange how often the predictable arrives as a surprise”
Strange…or depressingly repetitive?
Bad assessment. Every mathematical formula has parameters. The parameters in this scenario change change very easily hence outcomes. Change the retirement age ‘poof’ … totally new numbers. Change the tax rates. Build nuclear reactors and rid dependency on dirty oil. Start taxing the zillions in offshore accounts like Swiss and Dubai. Enforce either competition or price controls on drugs. Allow all qualified applicants into private Medical School. Make retirement payouts a function of individual contributions.
The unsustainable of the European welfare system has long been known, but politicians and the Left have stuck their fingers in their ears whenever anyone tried to tell them. The People too are like a dog which having been tossed a bone is likely to take the hand off anyone trying to remove it. The politicians not only do nothing, but keep tossing more bones.
One element the article overlooked, is the influx of uneducated, immigrants from poor countries and with no assets, many of whom do not work or are low paid. None of them, or their dependent, has paid into the various welfare funds, but are immediate recipients therefrom for health and education if not actual welfare handouts. Furthermore, many dependants are elderly and qualify for pensions, again without having contributed either much or at all.
In Greece, the union workers are demanding that the austerity measures be rescinded and replaced with more taxes on other people.
We’re not that much different.
The American middle class wants the rich people to pay for everything too. Almost half the people pay no federal income tax and that’s mostly middle-class folks deducting and itemizing their way out of it.
That is not sustainable.
I disagree that the middle class wants the “rich” to pay for anything. I’m middle class as are all of my friends and associates and we all just want to be left alone to take care of ourselves. Perhaps what some people believe is that if the government is going to raise taxes for some BS program then as long as they don’t have to pay for it then so what. They aren’t necessarily looking to benefit, they just don’t want to pay for it.
Public “servants” in thrall to “intellectuals”. Do /did they have a universal plan, in the outcome of toppling all western national structures destroyed, undermined, under the aegis of “progression”, fairness, compassion… Or is all this just a result of incompetence, arrogance, competition between egomaniacs as to whose plan is to be accepted? And the mentality of a con-man. Never give a sucker an even break. The effects of giving over the administration of societies and nations to clever four – year olds, to play with the assets of the house. While the parents beam at the cleverness of their “little one”,the bearer of their future, UNTIL they discover that he has brought down the house. And then they require and insist that all those “non-intellectuals” so derided while the favourite child was coddled and praised, are to bail out their sinking society, under threat of even more disruption. God save us from philosopher kings.
One other downfall of a dwindling birth rate is that Muslim immigrants are taking over their societies. Listening to Mark Steyn crystalizes just how bad the EU is and will get because of their stupid economic ways, stupid immigration laws and stupid cultural mores.
Well said John Frary.
People visit Las Vegas and make the same old joke about the opulent casinos and how the owners ‘afford’ to build them – but it’s an acknowledgment that the house wins in the end.
European governments (and many others) are a kind of ‘reverse casino’ in which deficit spending and debt reach unsustainable levels.
Greece is the equivalent of the old Sands or Aladdin (with other nations to follow). In Vegas they have and use the option of demolishing it and starting over. What options, if any, are left for these nations and their shiny, smiling socialist leaders?
This humorous cartoon at http://drawfortruth.wordpress.com/2010/03/02/fuzzy-math/ is my response!
+1
An arrogant, socialist Europe marches on into a bankruptcy that would have occurred decades ago if Europeans had actually had to field armies to defend themselves, instead of taunting the Soviets from behind an American missile shield.
And now we in America trip along the same path into cradle-to-grave nannystateism….and our own demise.
There is hope, yet, for our European friends. I have an interview with ITALY’s TEA PARTY coordinator, and some information on the DUTCH TEA PARTY movement. I will have more next week, as I get details and translations:
http://templeofmut.wordpress.com/2010/05/19/interview-with-italys-tea-party-organizer/
The irritating thing about this is that for all these years, we have been going into debt to support a social welfare state that is a giant paradigmatic failure. With trillions of dollars spent, we still have poor people. We see no end to them. We never seem to get a satisfactory answer to why we never consider actions to deal with the behavioral causes of poverty. We let people retire at an irresponsibly young age, and we are shocked that we now can’t afford Soc security and Medicare. How about retirement at 70 or 75? How about phased retirement, so that the executive could go to 30% time for 5 years before they retire?
The tragic thing about the European collapse (and it will be even worse here), is that in the end, the people who sacrificed their youth to get an education, got a good job, worked hard to keep and succeed in that job, and saved their money by living below their means are going to be forced to bail everyone else out. These are the people who are going to be seeing the 80-90% income tax rates, and who are going to see their retirement funds stolen via stealth taxes and “means testing”.
If you have money in Europe, better figure a way to get it out so you can keep some of it.
If you have money in the US, better do the same. The liberals who run the Union-Lobbyist-Government complex won’t go down without a fight, and they will take your IRA and 401K with them.
With trillions of dollars spent, we still have poor people. We see no end to them.
Because we keep defining poverty up.
http://www.heritage.org/Research/Welfare/bg1713.cfm
“Overall, the typical American defined as poor by the government has a car, air conditioning, a refrigerator, a stove, a clothes washer and dryer, and a microwave. He has two color televisions, cable or satellite TV reception, a VCR or DVD player, and a stereo.”
Ours is the only country in the world where the poor are fat! Wait, I will taken that back. In Australia on a tour I saw the aborigines in Alice Springs, and there were all these fat black people with skinny legs. People whose ancestors could survive on a few scraps of food a day now have access to western diets are are suffering from it.
In 1835, Alexis de Tocqueville wrote in “Democracy in America”…”The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money…” Greece and Europe are just a little farther along in this process than is the U.S. Those angry and disbelieving crowds of public employees rioting in Athens demanding that someone, anyone, keep the spigot open on “full” are the harbringers of what faces most of the West very, very soon.
In this morning’s news comes word that the seiu and the afscme are collectively putting together a pot of 100 mil to help retain incumbents who “value” these public unions members. Sounds like Greece in the streets, apropros of this article.
Where did the $100M come from…Soros?
No, the money comes from the poor suckers who join the union and pay dues
No suprises here. The SEIU and AFCSME are virtually on record as saying that they will “punish” any California state legislator who advocates budget cuts or limits on the pay and benefits paid to public employees. (We all know the fantastic financial shape that the Golden State is in these days.) But then again these unions have mastered all of the thuggish political arts. They know that “their” politicians will first cower before the boot and then lick the hand that offers them a few bucks. Pathetic!
No–taxes to wages to dues checkoffs to union officers to candidates to ……..
$100M is peanuts to the billions they stand to loose if rational budgeting were to catch on.
And now comes the NYT with an article:”Padded pensions add to NY fiscal woes” Rumpelstiltskin rides again.
If the European Union falls apart, this year will be considered the beginning of it. Successful nations like Germany will not stand for having their own economies put in harms way because of nations like Spain and Greece. In retrospect, England may have been very smart to stay out of the whole thing.
Turkey has probably seen it’s chances dashed forever – the likelihood is that the EU will have vanished first.
If the EU does break up, I predict Germany will be the first. They are not happy about Greece and are asking themselves what the hell the problems of Greece have to do with them and why Greece was even criticizing Germany as to why it wouldn’t help.
The biggest news you probably didn’t hear this week is that at a big meeting in Argentina, most every South American nation has agreed to start an EU equivalent there. They will have one passport and one currency and a central bank. It is predicted you be up and running by the end of the decade.
The United States of South America. Good luck with that one. By the end of the decade, murder will probably be the number one cause of death in South America; it already is in half the countries.
Learn from the sad experience of the EU, or live to see it repeated here;
It is a short schedule, people: ‘This could be _you_’ in 10 years, max.
That should be an interesting fight. It is essentially a civil war. Those who take vs those who give. Will they hold their neighbors hostage? Like it is bound to happen in America? Speaking of America where do 50 percent of the country go when they no longer want to be the slaves of the other 50 percent? There will be a civil war, and slavery will once again be the catalyst. Ironic, isnt it?
#19 SCYTHE: Is that a promise? “Tis a consummation devoutly to be wished!
Excellent article,on the havoc wrought by yet one more virulent(probably fatal) European “ISM”:Welfare Statism.Memo to Muslims:No need for terror,just continue to immigrate and move in after the inevitable pan euro welfare bread riots;only don’t forget to bring a whip,use it often,the Euros crave humiliation.
When will everyone realize the obvious?
The only hope to reform western economies and save western democracy is:
Abolish labor unions. Repudiate all union labor contracts, benefit and retirement contracts, and reform the rights, wages and benefits of public employees and teachers in line with private employees…the people.