The Great Denial

CAMBRIDGE: Social security is the great cash cow of irresponsible governments. At their beginning, when governments introduce a traditional social security system they gain quite a few decades to collect taxes before the first sizeable payouts to retirees show up. But then, yet a few decades later and reinforced by longer life expectancy and sharply lower birth rates, the system goes bust: tax inflows are insufficient to balance the outflows in the form of payments to retirees. What was attractive as a way of financing government in the second half of the 20th century becomes a formidable headache 20 years from now.

The size of the problem, the fact that it hits so many countries at the same time, and the great difficulty of doing something about it all call for confronting it as soon as possible. Yet, the Great Denial is practiced by governments and international institutions alike. This is as true in Japan as it is in Europe even though their problems are by far the worst in the world.

In the past decade attention has focused on bringing down budget deficits, establishing the EU convergence targets and the like. But these targets have been organized around the explicit public debt already on the books with absolutely no provision for the implicit debt implied by social security liabilities. Yet, these liabilities are just as real as the existing public debt and, in quite a few cases, their present value is as high or higher than the public debt numbers.

In Japan, for example, existing public debt is near 100%, but there is an extra 150% of GDP in net pension liabilities. The sum is stunningly large and presumably unpayable. Moreover, the prospect is not a distant one, but something knocking at the door: population (hence the number of taxpayers) is already declining, the social security accounts are already turning to deficits and 15 years hence the debt mountain will be crushing capital markets. In such a situation one needs urgent reforms that create more taxpayers, not fewer as is now the case as a result of partial restructuring without deregulation, good budgets and lots of growth. Japan has none of these.