This issue keeps showing up over the Internet, so it makes it an easy story to address: Most government pension programs are unsustainable. As I’ve mentioned recently, the French in particular don’t want to accept the economic reality of their government pension system, and have shut down their country as a result. However, it is now being reported that there are only five countries whose pension systems can survive (No, the United States didn’t make the list).
Ignoring the moral issue against the government providing pension benefits, basic arithmetic is all that is necessary to explain why these pensions will result in long-term bankruptcy for any country.
For example, if young citizens pay into a government program to pay retirees, yet simultaneously older citizens demand longer vacation time, fewer work hours, prevention against employment termination and a young retirement age, eventually all the revenues coming into the program will not pay all the beneficiaries. To exacerbate the problem, these programs often create the terrible result of increasing unemployment for the young people who need to fund the system.
It would be one thing if the politicians were responsible with the money, but Public Choice Theory explains why that is unlikely to happen. Bureaucrats simply fund projects with revenue generated from the pension plans, rather than holding the money in trust. The result is that the politicians get elected for the projects they vote to fund, and over time there is no more pension to pay retirees.
The great irony is that the politicians themselves often retire with gold-star pensions before their constituents realize their own pensions are insolvent. Sadly, the French will soon learn that throwing a nationwide tantrum won’t change the economic reality.