Hidden National Debts That Threaten Pensions

Pension and healthcare costs for people approaching retirement are at risk because governments are deliberately keeping savers in the dark about massive hidden debts.

As a result, the government will have to cut public spending by more than 25%, slash health and social spending by half or significantly increase tax, warns the Institute of Economic Affairs.

The institute claims governments in Europe and the US are masking the true extent of their debts and how repaying the money will deprive an aging population of care, pension income and benefits that they are expecting.

The main problem, says the report, is financial figures published by governments do not include the cost of looking after the rising number of future pensioners, so exclude the true level of spending needed to maintain pensions and healthcare.

Tax gap

The research explains as populations age in many countries, including the UK, tax revenues will decrease and leave a gap between available cash and the money actually needed to fund services and pensions.

Without policy and spending reform, the institute claims:

  • The UK must cut total spending by more than a quarter, or health and social care protection expenditure by 50% to avoid tax increases if current obligations are to be met from tax revenue in the long run.
  • If the US is to close its fiscal imbalance federal taxes will have to double into the indefinite future, or federal spending will have to be cut by over a third.

Massive debts

Calculations also suggest governments should:

  • Measure debts based on how much current taxes cannot finance future spending plans as past debt is equal to 85% of national income in the EU or 2.1% of the present value of future projected GDP
  • Adding future spending commitments reveals the true level of debt in the EU equals 13.5% of the present value of future projected GDP, while unfinanced future spending commitments are 11.4% of present GDP, over five times the current visible debt.
  • The hidden debt problem in the EU is worse than in the US because of demography and poor policy decisions. EU expenditure on social security programmes is about 30% of GDP, compared with 15% in the US.

Professor Philip Booth, of the Institute of Economic Affairs, said:

“If policies and taxes continue as they are, today’s younger generations face a future of higher taxes or less government benefits. The sooner the government switches policy the better for everyone. People have opted for the next generation of taxpayers to fund their retirements for too long and must make some personal sacrifices to resolve the problems.”

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