Former British Prime Minister Margaret Thatcher once famously quipped, “The problem with socialism is that eventually you run out of other people’s money.” This economic truth has finally become reality for Greece as its banks have shut down, its money supply is nearly gone, and its people have rejected a debt-relief plan from European leaders.
Massive government and public-sector expansion combined with runaway deficit spending on increased welfare and pension programs has, in part, led to Greece’s economic downfall. According to The Economist, Greece’s spending on pension benefits was an astonishing 17.5 percent of its total Gross Domestic Product (GDP) in 2012 and is projected to reach 25 percent of GDP by 2025. By comparison, U.S. spending on pensions (primarily Social Security) is estimated to be 6.8 percent of GDP in 2015 and seven percent by 2020. Nearly one-fifth of Greek government spending is comprised of pensions to its retirees.
This bloated retirement system was caused by decades of over-promising by politicians to secure the growing voting bloc of public sector employees, (Nearly 30 percent of all Greek workers are employed by the government.) The result is an overly generous system that allows a Greek worker to retire after 35 years and receive 80 percent of his working income. Predictably, this has led to a flood of early retirement, as many Greeks have opted to retire in their mid-fifties. The proportion of 55-64 year olds in the Greek workforce is just 36 percent, an extremely low number for a developed country. The United States and Germany, by contrast, both have an employment rate of over 60 percent for workers in the same age group. This says nothing about the will or work-ethic of a nation, only that there is a direct relationship between a government disincentive to work and overall economic productivity.
In addition to the short-term effects of extravagant benefits, the underfunding of pensions implicates a moral crisis of intergenerational social justice. Future generations will bear the burden of paying for this lavish retirement spending, limiting their financial and social mobility.
While America does not have the same problems collectively as Greece, similar pension debt vulnerabilities are arising across the country. Unfunded state public pension liabilities (the shortfall between promises made to retirees and workers and the funds currently available to pay for them) total an estimated $4.7 trillion nationwide. The city of Chicago alone has unfunded pension liabilities of $26.8 billion. The U.S. trend toward government reliance, despite its harm and lack of sustainability, is clear. Politicians routinely promise greater benefits without a concurrent plan to pay for them, preferring to pass the cost to the next generation. This starts a perpetual loop of politically expedient benefit increases without proper budget adjustments, creating substantial debt. Future generations will be held responsible for this immoral cycle which undermines both liberty and prosperity.
The United States is seeing this government benefit crisis unfold in its territory of Puerto Rico, which now has debt totaling $72 billion that “is not payable” according to Governor Alejandro Garcia Padilla. The Wall Street Journal reports that all three of its public pension funds are $34 billion in the red and will run dry by 2020.
Austrian economist F.A. Hayek warned of the financial toll that could be placed on a country due to a progressive pension system. These systems, invariably, grow exponentially over time, especially when used by self-interested politicians. In The Constitution of Liberty, he said that politicians would “turn the whole system into a tool of politics, a play ball for vote-catching demagogues.” Further, he warned against the unsustainable modern pension scheme, in which older beneficiaries take not from their own contributions but from current workers. Hayek continued, “Democracy will have to learn that it must pay for its own follies and that it cannot draw unlimited checks on the future to solve its present problems.”
One of the primary differences between the United States and Greece is the amount of production in relation to consumption. America has serious debt and deficit issues but it also has vibrant private-sector production which leads to the organic growth of wealth and overall economic stability. If a government, such as Greece, makes public-sector work or retirement more attractive than private enterprise, productivity and wealth creation fall which leads to deficit spending. “A society’s wealth may be measured by its consumption but its wealth consists of its production,” writes Kevin D. Williamson in National Review. “Greece has too few people working in productive business enterprise and too many receiving government checks, either as employees or welfare recipients – a distinction that is increasingly difficult to make in Greece and elsewhere.”
Consumption with minimal production is a recipe for disaster. Since Greece joined the European Union in 1999, it has been on a regressive trend of increased government employment and benefits, while private-sector employment and production have steadily decreased. Greece has finally reached a tipping point where its creditors will no longer allow the country to pass the buck; negotiations are underway this week with the European Union to determine whether Greece will remain as a member state and whether it will be allowed to continue to use the Euro as its currency.
It is unlikely that America could fully replicate the perfect storm of Greece’s economic collapse, but it continues to trend in a direction that mimics principles of the Greek failure. The United States currently runs an annual budget deficit of over $500 billion and has a national debt over $18 trillion. Increased government spending and massive pension liabilities are slowly chipping away at the gains made by free enterprise and the production of the private sector. As Thatcher and Hayek warned, funding retirees with the wages of current workers is unsustainable because, as Greece now knows, the money eventually runs out.
Economic prosperity is rooted in free markets, entrepreneurship, and liberty; not in greater pension benefits and Social Security payments. America would do well to learn from Greece’s mistakes and reinforce those foundational values that built it into an economic powerhouse, not those that threaten to diminish their effects. Financial responsibility is vital for economic prosperity, but more importantly, for genuine social justice.