O Intermitente<br> (So long, farewell, auf weidersehen, good-bye)

O Intermitente
(So long, farewell, auf weidersehen, good-bye)

terça-feira, setembro 21, 2004

Will The Pension Time Bomb Sink The Euro?

Excertos do artigo de José Piñera no Cato Journal.

The population in Europe is aging and declining. A trend that could have been perfectly manageable with foresight could turn into a catastrophe given the increasing unfunded liabilities arising from pay-as-you-go (PAYGO) public pension programs, now more than 200 percent of GDP in France and Italy, and more than 150 percent of GDP in Germany. This situation is especially difficult in a continent where entitlements are deeply entrenched in a welfare state culture.

The European Commission recently stated, "There is a risk of unsustainable public finances in some half of EU countries. Belgium, Germany, Greece, Spain, France, Italy, Austria and Portugal are on this black list." Furthermore, the monetary affairs commissioner of the European Union warned, "There is only a limited window of opportunity for countries to get their public finances in order before the budgetary impact of aging takes hold as of 2010" (EUobserver.com, May 21, 2003).

So, the PAYGO pension system could turn out to be one of the gravest threats to the single European currency.


[A] division is emerging between what can be termed a "Funded Europe" and an "Unfunded Europe." The first group comprises countries with large private pension systems (Britain and The Netherlands), those that have recently introduced personal retirement accounts and could go even further (Sweden and Poland), and those with such sound public finances that are able to "fund" the PAYGO system with general tax revenues (Ireland and Luxembourg). The second group comprises the four big countries that concentrate the bulk of EMU population and GDP - France, Germany, Italy, and Spain - and all the rest with unfunded PAYGO systems.

The first skirmishes have already begun around compliance with the Maastricht rules. While Belgium?s prime minister says the rules on deficits are "our bible" (The Economist, October 4, 2003), the French prime minister retorts, "My duty is not to solve mathematical problems to please a particular office or country" (The Economist, September 13, 2003). "Unfunded Europe" leaders may want to follow the old Latin American recipe - namely, devaluation, so that the ensuing inflation reduces the purchasing power of benefits. But ?"unded Europe" will probably oppose devaluing the euro. A clash may ensue amidst the centers of decisionmaking in Europe, especially within the board of the European Central Bank. Of course, this perspective may be behind the reluctance of increasingly "funded" countries like Britain, Denmark, and Sweden to join the eurozone.

More than renewed armed conflicts among European countries, as Martin Feldstein (1977) has envisioned, I believe that the prospects are for intense, exacerbated, maybe even violent, age wars: the young resenting the confiscation of a substantial part of their hard-earned salaries; the old living in permanent fear of the growing budget deficits and the possibility of substantial benefits cuts, either directly or through inflation.

It cannot be denied that European workers in the PAYGO pension system are like passengers on the Titanic. By destroying the essential link between effort and reward, between contributions and benefits, this collectivist system encourages what Bastiat called "legal plunder." And by making the finances of the system dependent on fertility rates and life expectancies, it has been relegated to the wrong side of the European demographic megatrend of the 21st century toward aging and declining populations.


The way out is to introduce personal retirement accounts that reestablish that essential link between effort and reward and move toward defined-contributions rather than defined-benefits pension systems. Already 15 countries have followed this path, including important European ones like Poland and Sweden (Piñera 2001).

William Shipman (2003: 1) contends that "transition financing would be a complex issue," but that "it is cheaper to move to marketbased systems than to continue current PAYGO systems." Indeed, he thinks that "it is possible to design a transition scenario that is a win-win situation for all generations." A gradual and economically feasible transition to a private system has already been identified for Spain (Piñera 1996).

A system of personal retirement accounts would also improve labor mobility, another key to a well-functioning monetary union. And, if complemented with a reform of the disability system, it would enlarge the available labor force and reduce wasteful government spending.

The prospects of the euro, and of European integration, would be much better if one of the big countries of the eurozone were to begin a transformation in this direction, leading the way for the rest to follow (Piñera 1998). Ultimately, if Europeans, Americans, or Japanese do not want to have enough babies, they will have to accumulate enough euros, dollars, or yen in personal retirement accounts.

posted by Miguel Noronha 11:26 da manhã

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"A society that does not recognize that each individual has values of his own which he is entitled to follow can have no respect for the dignity of the individual and cannot really know freedom."

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