The Pensions Crisis
Several stories are appearing in the popular press today reporting that Gordon Brown may be forced to include the estimated £530bn shortfall in the state pension fund in his overall figures for the national debt. This would, when added to our existing national debt of £478.6bn, take the total national debt over the 1 trillion mark. In terms of GDP this is an increase from 40% of GDP to almost 100%. In fact, it turns out the situation may be even worse, as some believe the £530bn estimate from the government is rather on the low side, and the real figure is closer to £960bn.
The real story here is not really about an increase in national debt, however. Future pensions payments are not really a debt, but a future liability, i.e. a commitment by a government of future benefits to the general population. This is also sometimes termed an ‘implicit’ debt. Real debts are those which require repayment, such as the bonds issued to banks by the government every year to fund their day-to-day expenditure. As such, implicit debts have usually not been included in overall national debt figures. The reasons for this are twofold. Firstly, it is non-trivial to obtain a decent estimate of the future pensions and wider benefit liability, as it depends on several factors such as projected population, lifespans, people taking out their own private pensions and the overall profile of the retired population. Secondly, until recent times it has not been such a huge amount of money to be significant enough in comparison to the level of immediate debt.
The implication, therefore, of the suggestion that these figures should now form part of the overall debt calculation, is that the size of the gap in the state pension fund has now reached such alarmingly large proportions as to have transitioned from its previous status of a side-issue to become a very real and burning central issue in public finances. In other words, it’s getting so big that we really need to start thinking about it. Of course, nobody has yet come up with any workable solutions to this problem, and the government appears to be firmly stalled at the initial panic stage.
The CIA world fact book lists the UK as 63rd amongst 114 countries in rank order of national debt as a percentage of GDP, on 43.1% (although one of Gordon Brown’s “golden rules” is that this figure should be kept under 40%). In this respect we are currently fairly well positioned, but it will be interesting to see how this ranking order would be affected if all countries’ debts were recalculated to include future pensions liabilities. Considering the UK has one of the worlds longest running pension schemes, a larger welfare state than many other countries, and an ageing population, I would not be surprised if we find ourselves a bit higher up the ranking order than before.
