Burden of Retirement Funding in Greece

For John, BLUF:  The good news is that we seem to have a handle on this in our City.  Nothing to see here; just move along.

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From a nameless and faceless reporter for the Associated Press, The International New York Times gives us "Why Pensions Are the New Flashpoint in Greece's Crisis".  Not Greece's "new" crisis or its "economic" crisis, but just one, big, overall, all consuming, crisis.  And if it is a crisis for Greece it is a crisis for Europe.

Here is the beginning of the article:

Combine a rapidly aging population, a depleted work force and leaky finances and any country's pension system would be in trouble.  For debt-hobbled, unemployment-plagued Greece, it's a nightmare.

Hemmed in by a grim economic reality and tough-talking bailout creditors, the leftwing-led government in Athens is now attempting the seemingly impossible: to reform the pension system without cutting pensions, largely through a steep increase in social security contributions.

The overhaul, which creditors are demanding in return for rescue loans, means Greeks who have a job — and who are outnumbered by the unemployed and retired — have to pay for the rest.

Unions are up in arms about the move, which has become the main hurdle in Greece's negotiations with its European creditors and the International Monetary Fund.

Critics say the reform will heap the most pain on self-employed professionals and farmers, forcing them to pay up to three quarters of their income in pension contributions and taxes.  They warn the majority will be forced to change jobs or emigrate — accelerating the brain drain the country has suffered since the crisis started in 2010.

"We are fighting for our very survival," said Georgios Stassinos, head of the country's biggest engineers' union.  If the reforms are adopted, he said, "the country will be left without engineers, doctors, lawyers, pharmacists and economists."

So, why is this important?  If Venezuela collapses it is a small implosion contained within South America.  If Greece implodes it is a major failure on the Southeast Corner of Europe.  Greece could go back to being part of some [new] Islamic Empire, just as it was 200 years ago.  One of the possible futures for Europe is for Greeks to leave Greece in large numbers and for immigrants to arrive in large numbers, altering the European Immigration Equation.

And, the Greek crisis is a pointer to what could happen to us, economically.  Like Puerto Rico.  Like Illinois.

The money quote is:

The overhaul, which creditors are demanding in return for rescue loans, means Greeks who have a job — and who are outnumbered by the unemployed and retired — have to pay for the rest.

In addition, a friend of mine asked this question on line:

I would be interested in knowing the point when a country hits the proverbial 'knee in the curve,' where increases in taxes drives more off-book activity, and actually results in less government income.

Ah, the Gray (or Informal) Economy.  The earnings and sales that are not taxed.  In the United States, ten years ago, it was estimated to be 7-8% of the overall economy.♠  In Greece it was estimated to be 26-28% of the overall economy.  So, for every potential dollar (or drachma) of taxes that could be collected, a little over a quarter wasn't, but went into the pocket of some scoff-law.♥

Regards  —  Cliff

♠  This would be when you hire an illegal alien to do some extra yard work for you and you pay him or her in cash.  Off the books, as they say.
♥  As a side note, for Senator Sanders, Sweden, Norway and Denmark run 15-18%.  Why is that?