Beware: pension systems about to collapse. Not! More mainstream fiction

Sometimes, one thinks that the intellectual world should evolve as intelligent people take account of the dissonance between their ideas and the facts before them and adapt their views. I know that doesn’t happen much but it should. I have studied the philosophy of science deeply enough over my student and postgrad days and beyond into my career to know that intelligent people have the capacity to completely fool themselves and hang onto defunct ideas as part of a paradigm-resistance to change. We know why that happens: senior professors have their reputations and legacy at stake, they control appointments, promotions, access to research grants, publication success for junior academics, and continuity of lucrative consulting empires. But sometimes I still am amazed when I read some research paper that I know has taken months to research and write up and which has been presented and talked about in seminars and conferences, and after dinner drinks and all the rest of it, but which bears no correspondence with the underlying reality. That was the situation when I read a research paper from three economists who were claiming that taxes have to rise and pensions cut if governments are to escape insolvency in the face of ageing societies. This continues, obviously, to be a powerful framework for proselyting the neoliberal mantra and a narrative that most people cannot see their way through to a conclusion that is all a fiction.

The fiction

The paper was published by the Centre for Economic Policy Research (CEPR) as part of their discussion series – Heer, B, V Polito, and M R Wickens (2023), “Pension system (un)sustainability and fiscal constraints: A comparative analysis”, CEPR Discussion Paper DP18181.

You have to pay for it unless someone sends it to you (as in my case) but they published a shorter Op Ed through the VoxEU portal – Pension system (un)sustainability and fiscal constraints: A comparative analysis (published June 18, 2023).

CEPR claims it is “an independent, non‐partisan, pan‐European non‐profit organization. Its mission is to enhance the quality of policy decisions through providing policy‐relevant research, based soundly in economic theory, to policymakers, the private sector and civil society.”

However, I always laugh when I read statements like that because their ‘economic theory’ is anything but ‘non-partisan’ or sound.

All these organisations that profess ‘independence’ are really just uncritical mouthpieces for the same economic framework.

The famous quote – “If you tell a lie big enough and keep repeating it, people will eventually come to believe it” (which was falsely attributed to Nazi Joseph Goebbels) is the strategy that economists use to cover the degenerative nature of their economic theory and maintain prominence in the public debate.

A degenerative paradigm or ‘research program’ (following Imre Lakatos) or ‘bad science’ is one where “successive theories do not deliver novel predictions or if the novel predictions they deliver turn out to be false” (Source).

How many times have economists predicted that a currency-issuing government will run foul of the bond markets and run out of money and be forced to cut net spending dramatically?

Answer: lots.

How many times has it happened?

Answer: never if the government resists borrowing in foreign currencies and/or pegs its exchange rate to some foreign currency like the US dollar.

Anyway, say it enough times and people believe you even if what you are saying is a lie.

The Op Ed cited above is an example.

The authors spin the usual narrative:

Many advanced economies face the challenge of keeping their old-age public pension systems sustainable.

They talk about “unfunded old-age pension systems” as if there is a growing liability that will not be met when realisation (people retiring) occurs.

People retire every day and in these systems they smoothly go on to receive the pensions without drama.

But the latest narrative ties in the increasing scale argument – ageing societies mean more people than ever before will be retiring.

In that context, governments will run out of money.

The original paper I noted above studies “12 advanced countries” – “Austria, Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal, Spain, the UK, and the US”.

Immediately a reader should spot the design flaw in the study – and one which permeates most of these discussions about public sector solvency.

The study sample combines to entirely different monetary systems, each with specific characteristics that make it impossible to discuss as if they were one.


Austria, Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal, and Spain are among the 20 Member States of the Economic and Monetary Union (the ‘euro zone’) and each of these nations surrendered their currency sovereignty when they entered the common currency.

That surrender then means that each of those Member States has to use tax revenue in order to spend in what is for them a foreign currency and if they want to spend more than they could raise in taxes then they have to seek funds from the private bond markets one terms that those private speculators find satisfactory in terms of risk and reward.

All of which means they can run out of money should the bond markets assess the credit risk of the public debt is too high.

Which is more or less what threatened to happen in 2010 and again in 2012 during the GFC.

What stopped that from happening?

The intervention of the European Central Bank (as the currency issuer in that perverted system) via the introduction of the Securities Market Program (SMP) in May 2010 and then later the evolving public sector purchasing programs (government debt buy ups) that followed.

In effect, the ECB became the fiscal authority in the EMU and used their currency capacity to render the private bond markets benign by buying huge volumes of government debt and forcing yields down to very low and stable levels.

But the point is that all EMU public debt has credit risk (the risk that government will not be able to honour it) and the bond markets, if the ECB does not intervene, know it and exact a price in yield terms for funding these governments.

There is the possibility in that system that a Member State could face insolvency although that would bust the poorly designed monetary system apart and that is why the ECB has so far prevented that from happening – and – will probably never let it happen.

Which means that even though the EMU has those characteristics, claims that a government will go broke are probably moot.

The problem then, for those Member States, is that the ECB has demonstrated in partnership with the European Commission (and the IMF) that it will only provide the ultimate solvency buffer under strict conditionality – and that means the Member States have been subject to pernicious austerity which has undermined well-being for millions, via pension cuts, elevated and persistent unemployment, and increased inequality among the citizens.

However, comparing that sort of dynamic in the same study sample as the US and the UK is poor science.

The latter two nations face no prospect of insolvency ever in financial terms.

While as a matter of historical convention and ideological preference they still issue public debt to the private bond markets and have all sorts of pantomine about debt ceilings and analyses from offices of budget responsibility etc, the reality is that these governments like most will always be able to fund liabilities that arise in their own currency.

The only time they might ever default on those liabilities would be as a result of some perverse political motive that we have rarely witnessed.

They will never encounter a situation where they would have to default on pension payments in nominal terms.

So the first point then is that any time a study conflates nations that issue their own currency, do not issue debt in foreign currency denominations, and do not peg their currencies, with nations that do not have those characteristics, you can conclude one thing immediately, the authors do not understand the capacities of the nations they are comparing and are just applying a ‘one-size-fits-all’ economic framework from their textbooks, that is divorced from reality, to the question in focus.

That is definitely the case in this CEPR analysis.

The Op Ed motivates the reader with this statement:

Public pensions occupy a substantial, often double-digit, share of both national income and social expenditures. The costs and benefits affect people for most of their lives. The main threats arise from ageing populations and changing working patterns, with a larger share of the population demanding state pensions but a smaller share of active workers being responsible for funding them. To add to these long-run factors are various short-run issues that affect the fiscal stance of many countries, such as weak growth, rising interest rates, and soaring government indebtedness.

So it is all there – the fictional world or mainstream economics.

1. Ageing societies – rising dependency ratios – less people paying tax and more people calling on public income support.

2. Taxes fund government spending.

3. Lower economic growth reducing tax bases.

4. Rising interest rates passing through to rising bond yields and making it more expensive to ‘fund’ government net spending.

5. Excessive public sector indebtedness leading to bond market retaliation via increasing yields and failed debt auctions.

All of the fictions in one paragraph.

The only premise that is correct is that dependency ratios are rising in many advanced nations as a result of more people approaching retirement age and lower birth rates.

While that fact presents challenges to governments, it does not pose a ‘financial’ problem.

I will come back to that point

We know that a sovereign government is never revenue constrained because it is the monopoly issuer of the currency, which means the statement that an ageing society means there is “a smaller share of active workers being responsible for funding” such a government is meaningless.

We also know that for a sovereign government the level of public debt is irrelevant and the central bank can, any time it chooses, hold yields at whatever level it chooses.

So, any ‘problem’ that might arise from outstanding debt would be an entirely voluntary, confected one by the government itself for purposes that only it would fully know.

Which means that the exercise by the authors of the Op Ed whereby they compute: (a) “pension space” which they claim “measures how much scope a government has to finance public pensions from the taxation of labour income”; and (b) “pension space exhaustion probability” which “measures the probability that the pension space reaches zero at some point in the future because of demographic uncertainties”, are both time wasting efforts that have no application to the real world of sovereign governments.

While many hours may have gone into conceptualising these measures and computing them and lots of graduate students being given research assistance jobs, in the end, the final product is just ideological blather and not very interesting blather at that.

I won’t bore you with the technical detail of how they calculate these measures but a few points might give you an inkling to the ‘blather’ quotient.

They deploy what is known to economists as a “general equilibrium, life-cycle model featuring overlapping generations of households”.

What the hell is that?

GIGO is the short answer.

The households know the future basically because when they know they have to balance out consumption and saving over their lifetime to ensure by the time they can no longer work they have saved enough given their income.

When they begin their ‘economic lives’ (earning income and consuming) they have to make decisions about consumption and they are assumed in each period to ‘maximise their lifetime utility’.

The question you will ask is how does a 20-year old know what is going to be the situation when they are, say, 60 and that a decision at the age of 20 will be optimal over the entire lifetime?

Good question.

That problem is assumed away and these households have knowledge of all the available options over their lifetime.

I wish!

I could go more deeply into the assumptions they deploy but suffice to say where you start in these models is where the finish will end up in an analytical sense.

Garbage In Garbage Out!

So if you start off assuming that governments are financially constrained and add a whole lot of stuff about bond market sensitivity to risk and then ask what will happen when governments must fund an increasing number of old-age pensions when their tax base is shrinking then the result is obvious and rather trite.

If you start off assuming that governments can always fund their liabilities and bond markets can be dealt out of the picture by the currency capacity of the government then the pension story changes dramatically.

Their key result that pension systems become unsustainable is just the result of assuming that “the ability of labour taxation to raise sufficient revenue to pay for pensions” is constrained by the lack of taxpayers as more and more people get old.

Lot of equations and optimising calculus is not required to come up with that conclusion.

The calculation of “pension space” (which is just the estimated “pension limit – the maximum available tax revenues from labour income” minus the “aggregate pension expenditures”) becomes a trivial exercise.

They also calculate when the “pension space” is exhausted and the system collapses.


Anyway, they conclude that in 2020 (when they calibrated the exercise) that pension space declines over time and for many nations in their study (for example, France and Italy), the system collapses by 2030.

All the other nations run out of money by 2050.

I am not about to do it (waste of time) but I have seen studies like this before – in the 1990s for example.

And if I did the same analysis in the 1990s as has been done here I would probably come up with the collapse date as around 2020 or something.

It reminds me of the mainstream claims about Japan in the 1990s that its government could not possibly sustain the fiscal deficits it was running after the asset bubble burst and would soon run out of money or experience wild interest rate and inflation rate acceleration.

That didn’t happen did it.

Nor has any pension system collapsed, yet I am certain this sort of approach would have predicted such a collapse by now if done 30-40 years ago.

The authors then, blithe to how meaningless their results are, then claim that “It is clear from these results that pension reform will be required sooner or later.”

So they then spin the usual line:

1. Taxes have to rise.

2. Pensions have to be cut.

3. People have to work longer.


The pension system collapses much later in time.

And people are ‘better off’ because if pensions are cut they don’t have to pay as much tax! Another GIGO outcome.

What really is the issue of rising dependency ratios

All the remedies proposed above miss the overall point.

The problem of an ageing population is not that it will present government with a financial crisis.

Rather, the real problems are productivity and real resource availability.

If there are increasingly more people dependent on access for goods and services and increasingly less people producing those goods and services then the latter cohort has to be more productive than before or material standards of living will fall, independent of whether real resources are available or not.

Productivity rises when a nation gains more output per unit of input.

That, ultimately becomes the real challenge of the ageing society once the politics is sorted out to ensure we provide job opportunities and hours of work for those who desire to work.

Constructing the ageing society problem in terms of a challenge of government solvency (the ‘non-problem’) is not only based on erroneous reasoning and a misunderstanding of the capacities of the currency-issuing sovereign, but, also, can lead to policies that actually undermine the capacity of the society to meet the actual problem – maintaining full employment and adequate productivity growth.

Many nations have adopted an austerity bias as the neoliberal era unfolded and have seen output rates decline and productivity growth stagnate as a result of suppressed investment in productive capital, reduced skill development and declining scope and quality of public infrastructure.

It is all related.

To advance productivity, investment is required in human capital and physical capital including public infrastructure. Starving a nation of that sort of investment is the fastest way to undermine material living standards in the future as society ages.

As to real resource availability, are we really saying that there will not be enough resources available – service sector workers, buildings, equipment – to provide aged-care at an increasing level over time?

That, of course, is never the statement made and the authors of the Op Ed do not even consider it.

Their worry is always that public spending outlays will rise because more real resources will be required ‘in the public sector’ than previously.

But as long as these real resources are available then it only remains a political problem as to where they are used.

There is no financial problem.

If there is a political will then the currency-issuing government will always be able to bring the available resources into a desired use.

Primary schools investment will give way to aged care investment.

Investment in pre-school infrastructure and allowances will give way to pensions as the demography changes.

In this context, the type of policy strategy that is being driven by the financial constraint myths typically undermine future productivity growth and provision of real goods and services in the future.

It is clear that the goal should be, for example, to maintain efficient and effective education, training, and health care systems.

All of which are often compromised by expenditure cuts as governments claim they need to ‘save up’ to meet the future demands of an ageing society.

Clearly the real health care system matters by which I mean the resources that are employed to deliver the health care services and the research that is done by universities and elsewhere to improve our future health prospects.

That is, a nation has to ensure that there are real facilities and real know how to maintain an effective health care system.

Further, productivity growth comes from investments in research and development, not the least part, in universities and other research institutions.

Unfortunately, tackling the problems of the distant future in terms of current ‘monetary’ considerations (fiscal sustainability, insolvency fears, etc) have led to the fiscal austerity bias and underinvestment in vital infrastructure.

And by trying to solve the ‘non-problem’ now we worsen the real problem as time unfolds.


I am amazed really that given the experience during the GFC when trillions of government dollars were just typed into computers to save the world from financial collapse and also during the pandemic when fiscal policy expanded rapidly, that economists haven’t taken a pause for thought as to the validity of their framework.

But then that would be the action of a person seeking to uncover knowledge.

Economists, by and large, are not in the knowledge game, but, are, rather, ideological warriors who seek to advance the interests of the capitalist class, knowing they can glean well-paid consultancies from that class for services rendered.

That is enough for today!

(c) Copyright 2023 William Mitchell. All Rights Reserved.

This Post Has 7 Comments

  1. All we need to do, in response to these critiques, is promise to tax away the private pensions of those who say public pensions are unsustainable.

    At which point all the theoretical arguments against state and public pensions would immediately cease.

    Similarly I ask those who criticise the size of the UK government deficit whether they have transferred their cash savings to the Donations and Bequests account of the Commissioners for the Reduction of the National Debt.

    Because if they haven’t they can’t be that worried about it themselves.

  2. The pension system is always in danger, if the wrong policies strike it in the heart.
    That seems to be the case in the US, where many pension funds are beeing used in the great wall street casino.
    In europe (the CEPR paper is about the EU), we don’t have ONE pension system, but 27 different systems.
    The Portuguese pension system is a healthy system, because people pay BIG when they are contributing and are paid SMALL when they become pensioners.
    But, the wrong policies are always around the corner and can ruin the all thing overnight.
    The system always has been assaulted by the crony elites, many of whom are given big pensions, whitout any previous contribution to the system.
    The system is strong enough to overcome that, because crony elitism is always limited in size and because crony pensioners end up dying anyway.
    But there are pressures from the FIRE sector to privatize the pension system.
    It would become another casino, and everything would be ruined rappidly.
    That is the danger, not the “fairy tales” the CEPR is telling us – which resembles what you would get from some AI app, which ammounts to a pile of rubbish!

  3. Speaking of AI, isn’t it supposed to be a wunderwaffen that balloons productivity and vastly decreases the amount of workers needed? Sounds like a self-correcting problem to me!
    Of course, a lot of that is hot air too, but it at least it has some good uses; it’s just not magic.

  4. Bill, you wrote:
    “Answer: never if the government resists borrowing in foreign currencies and/or *pegs* its exchange rate to some foreign currency like the US dollar.”
    Pegs should be pegging.

  5. off topic: I saw an argument that japan didn’t increase their tax because it was suffering for a long time with deflation and that the inflation in pandemics was actually a good thing. What to say about that?

  6. No, as you say, it wasn’t Goebbels who ‘originated ‘ the Big Lie. It was Hitler himself in Mein Kampf, which he used to ‘explain’ Germany’s defeat in WW1, significantly due to traitors within, according to him.

  7. Thanks, though I am astonished that you give so much of your time to a paper in such a metphysical vein,

    Two points:
    a) “Primary schools investment will give way to aged care investment.
    Investment in pre-school infrastructure and allowances will give way to pensions as the demography changes.”
    – I assume you mean that the allocation of resources will shift over time, rather than a sudden cessation of nursery funding for instance, and constrained by differing rates of change. Sorry to spell oput the bleeding obvious – unless you had something else in mind.

    b) as a newcomer to your site, I suspect you have elsewhere discussed further the ECB’s need to support contries in distress, in spite of the Bundesbank and Germany’s consitutional court. Have you considered the ECB cancelling country debt that it has bought in ?

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