The Western world prides itself on many of its inventions and innovations — advanced technology that has improved the lives of people throughout the world and the idea of government-ruled-by-the-people are just two of many. Perhaps most significantly, the West also found a way — for the first time in human history and through financial advisors and government programs — to ensure that the lowest in society do not live in extreme poverty.
The adoption of social-welfare programs since the mid-twentieth century has undoubtedly helped millions of people by eliminating severe poverty in the West. (I am referring to “poverty” in a global context — like, for example, what I saw in India. Most people in the West who are poor today are not really poor by global standards.) But I fear that the ongoing economic-crisis may prove a distressing thought to be true: Entitlement programs, in the long run, are too expensive, and it is unrealistic for countries to have them.
Programs like Social Security in the United States have been founded on an amazingly-simple idea: the current, working generation pays for those who are retired at the time — since people have multiple children, there will always be many more in the working generation paying into the system than those retirees receiving the transfer payments.
But there was one problem that people did not foresee: Over time, birth-rates in all countries tend to decline as the average age of a society increases at the same time. One of the interesting observations in sociology and economics is that societies have fewer and fewer children as countries advance and progress. No one really knows the reason, but there are many suspected factors: increasing education, widespread use of birth control, civil rights for women, declining religious belief, and greater per-capita wealth. A related issue may be that families are less able to afford more children as governments increase taxes to pay for the social programs.
Take a look at the average number of births per woman in just a few European countries:
Here is the percentage of people in Europe who will be elderly:
And this is the percentage of people in Europe who are working-age and able to pay into social-security programs:
What these statistics reveal is that Europe will be unable to afford such entitlements for much longer. There will be fewer and fewer paying into the system as more and more receive money. And the current rioting in Greece shows that people will be very unhappy about any prospect that the money will run out.
Still, the problem is not only in Europe. In general, the same trends are present throughout the world as countries progress — birth rates are declining as death rates remain level:
In financial terms, many European countries — and, eventually, America — will be facing an economic crisis in the near future. As I wrote at the Return of the Great Depression blog:
By the end of 2010, more than half of the countries comprising the European Union are projected to surpass the maximum 60% debt-to-GDP ratio mandated by the EU to maintain financial stability.
In general terms, the reasons that a debt crisis may occur in many parts of the continent are a combination of existing debt, the economic recession, and expensive entitlement programs as the populations of European countries age and not replaced by younger workers who pay into the systems. As the next chart shows, much of the burden on the debt-plagued, European countries — those on the left side of the chart — is a result of “non-discretionary expenses,” which include interest payments and social-benefit programs.
As Washington Post columnist Robert Samuelson notes, Europe is already seeing the effects of extensive deficits and future debt:
What we’re seeing in Greece is the death spiral of the welfare state. This isn’t Greece’s problem alone, and that’s why its crisis has rattled global stock markets and threatens economic recovery. Virtually every advanced nation, including the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven’t fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies.
Americans dislike the term “welfare state” and substitute the bland word “entitlements.” The vocabulary doesn’t alter the reality. Countries cannot overspend and overborrow forever. By delaying hard decisions about spending and taxes, governments maneuver themselves into a cul de sac.
Moreover, as Foreign Policy notes, the recent European Union bailout does not address the core issue — too much debt in many European countries (and the United States as well):
For a start, 750 billion euros represents only about 18 months of the financing requirements for Europe’s most obviously vulnerable countries, which, contrary to pretense, also include Italy, whose debt burden and labor cost disadvantage is as high as that of Greece. The solution to their problems — a loss of competitiveness, inflated government payrolls, and rigid labor markets — obviously won’t be come with a new borrowing facility. These measures only buy time, and not very much time at that.
Indeed, the time available to bring these countries back from the brink is very limited. This is not about governments bailing out insolvent banks, as was the case with the financial rescues at the end of 2009; this is about unsound governments trying to bail out other unsound governments.
While people living longer and healthier lives is undoubtedly a good thing, the sad reality may be that entitlement programs, no matter how noble the intention behind them, may always become unsustainable in the end. Tinkering with programs like Social Security by raising the retirement age and cutting benefits might not be enough to counteract the long-term societal trends.
Earlier: Book Review — The Return of the Great Depression