Unprecedented Global Fiscal Environment Presents Significant Challenges

What’s worrisome about the current global fiscal situation is that it’s unprecedented in peacetime for so many large economies to be under such extreme fiscal duress and indebtedness. And part of the reason they are in such a fiscal black hole resides in the explosion in their structural, age-related liabilities. 

According to the IMF, the net present value of pensions, health care and long-term care out to 2050 dwarfs the costs of the banking crisis everywhere. 

Based on policy commitments in mid-2009, it is over 600% of GDP in Spain and Greece, 500% GDP in the U.S., 335% in the UK, and between 200% and 300% in other major EU countries. The precise numbers are less important than the orders of magnitude, and the implications for public policy.

It is no accident that this year, in Greece, Spain, France, the UK, and several U.S. states, for example, budgetary pressures have forced governments to implement or consider a variety of demographically driven policies. 

These include an increase in the retirement age, a temporary freeze on pensions, higher public employee contributions to pension schemes, and schemes to get citizens to pay more towards health care, or to specific conditions.