Actuarial Public Debt

The current definition of Public Debt is very poor. Only accrued past debt and current budget deficits are measured; no future obligations.

Hot from the press, the 'actuaries' behind the 83rd BIS Annual Report 2012/2013 show us the impact of the commitments to future spending on pensions and health care that are missing in current measure of public debt.

Age-related liabilities as a share of GDP, are projected to rise considerably between 2013 and 2040 in a number of countries.

Please notice that reforms enacted after December 2011, are not included in the next graph.

Actual Public Debt
End 2012, the impact of age-related liabilities on the actual public debt was calculated and analyzed by Stiftung Marktwirtschaft, in cooperation with the Research Centre for Generational Contracts.

In a report called "Honorable States? The Sustainability of European Public Finances in Times of Crisis" they calculated the effects for Europe as follows:

Reforming Social Security 
Without going into details, this graph makes perfectly clear that even an attitude of 'just managing debt' is hopeless and doomed to fail.

'Restructuring public debt' will only be possible if we have the courage to fundamentally restructure our social security system of pensions and health care. The sooner, the better.....

For those who still had hope on a positive U.S. outcome, just take a look at the debt-outcome of two non-EU countries:

Concluding Reflections
To get a sound picture of a country's financial sustainability, a first step would be to annually report real(istic) balance sheets on basis of actuarial public debt, e.g. debt including age related future obligations like state pensions and health care.

Ultimate, we need new market value based 'country state accounting principles' that include a complete set of  "future obligations" and "natural resources" (oil, gas, water power, etc.) on the asset side.

One of the main issues will be how to value a virtual and information society including fast changing and new future developments on basis of outdated valuation methods, developed in last decades of the last century.

Of course THE big challenge with such an ultimate country balance sheet will be how to value "human resources" as an asset. Why?

Because flexibility, responsiveness, education and entrepreneurship will eventually make the big difference in adapting a country's economy to a sustainable future. I suggest we start by valuing actuaries ;-).

Links/Sources:
- Spreadsheet with data used in this blog (xls)
-  83rd BIS Annual Report 2012/2013
- Report Honorable States? (2013)

Ageing and the Sustainability of Dutch Public Finances

In a 2006 (but still actual) research called, "Ageing and the Sustainability of Dutch Public Finances", it's stated that the ageing of the population jeopardises the sustainability of public finances in the Netherlands.

The doubling of the ratio between the number of retirees and the number of workers destroys the balance between future public expenditure and tax revenues. Indeed, the increase in expenditure on public pensions and health and long-term care will outweigh the increase in tax revenues.




Budgetary reforms are therefore necessary in order to avoid that future generations will have to raise taxes or economize on public expenditure.

Reforms in the field of social security of the last few years are a step in the right direction, but are insufficient. In particular, the decline of interest rates and the reduced wealth of pension funds have worsened the sustainability of public finances. The effects of reforms on the intergenerational balance are important for the question which further reforms are most attractive.