July 11, 2012 at 10:20 AM ET
The euro zone debt crisis has had a profound effect on the world economy. Countries such as Greece, Ireland and Portugal received emergency bailout money to stay afloat. Meanwhile, the U.S. government currently holds more than $15.7 trillion in debt, and lawmakers cannot agree on the best way to rein it in.
Governments end up with massive debts for a number of reasons, including government pension spending. Many of the euro zone countries that have the largest debt problems are also ones with the most generous public pensions -- notably Greece, Spain, Italy and Portugal. Greece, the poster child for the euro zone crisis, needs to find 1.4 billion euros ($1.73 billion) to fund its pensions just in 2013.
24/7 Wall St. identified the top 10 countries with the most generous public pensions. Based on a recent report by the OECD, we examined pension replacement rates, which measures how effectively a pension system provides income during retirement to replace earnings prior to retirement. A pension replacement rate of 100 percent means an employee would continue to receive a full salary during retirement. The countries on the list promise to cover the highest portion of the salaries of those joining the workforce in 2010. These are the 10 countries paying people to retire.
When governments are faced with pension funds liabilities, they can take short-term remedies such as allowing the pension funds to go into debt or providing tax subsidies to fill the gap, says Matthias Rumpf, chief media officer for the Organisation for Economic Cooperation and Development. Options such as the tax subsidies can have a sizable impact on government budgets. But no matter what short-term fixes governments take, "most of the problems on the pension side will return in the future," Rumpf tells 24/7 Wall St.
Some of the countries on our list currently suffer from very weak economies. Greece has a credit rating of CCC, indicating junk bond status, -- that is, a higher possibility of default. Spain has a long-term unemployment rate of over 9 percent, higher than any country measured by the OECD. Italy has a debt load equal to 109 percent of its GDP, higher than all countries except Greece, while Portugal’s debt is 88 percent of its GDP, the fourth highest percentage of all countries measured.
However, strong public pensions aren’t necessarily indicative of a weak economy. Two countries on the list -- Luxembourg and Finland -- have perfect AAA foreign currency credit ratings from Standard & Poor’s. Those two countries, along with Austria, also have long-term unemployment rates below 2 percent. Not every country breaks the bank to fund pensions either. The Czech Republic, Luxembourg and Turkey each spend less than 10 percent of GDP on pensions, while still providing generous pension rates.
The OECD report published data for its 34 member countries, the majority of which are in Europe, but also include countries such as the U.S., Canada and Japan. The measurements only take into account pension policies as of 2010, which Rumpf says will likely change over time. In order to reduce their liability, many countries have already begun moving away from guaranteed pensions to defined contribution pensions instead, plans modeled off of a 401(k) or 403(b) in the U.S.
24/7 Wall St. considered a number of other factors to provide additional context: the retirement age and life expectancy for both men and women, net pension replacement rates (pension payouts after adjusting for taxes and other fees) and replacement rates for those making more or less than the median income, along with additional factors provided by the OECD to examine the fiscal health of countries.
These are the 10 countries paying people to retire.
Greece’s public employees get a pretty sweet deal. They get to enjoy nearly a full salary for life beginning at age 57, the earliest retirement age of all countries except for Turkey. After figuring in tax deductions, the replacement rate for those making the median income is 111.2 percent, the only country with net replacement rates above 100 percent for that income level. Since both men and women are expected to live into their 80s, the government is on the hook for a lot as evidenced by the 13.6 percent of GDP that is spent on public pensions -- more than all countries in the OECD except for three. Government spending in Greece has definitely taken its toll. The country has $147.80 of debt for every $100 in GDP, a higher ratio than any other country on the list by a longshot.
In Luxembourg, once reaching the age of 60, citizens making the median income can begin drawing 87.4 percent of their income. Meanwhile, for those making only half the median income, they can take home 97.9 percent of their salary by age 60. Fortunately, Luxembourg’s economy is far stronger than other European countries such as Greece. Its sovereign debt is only 12.6 percent of GDP, the best of all countries on this list and the fourth best of countries measured by the OECD. Furthermore, household disposable income is $35,321, second only to the U.S. in the countries measured by the OECD, while household wealth is $72,644, after only the U.S. and Switzerland.
Despite Spain’s significant economic woes, the country manages to pay out a sizable pension to employees. Spain’s pension pays 81.2 percent of the salary for those making the median income, half the median income and one-and-a-half times the median income. While the retirement age is higher than in many of the countries on the list, men are expected to live 18 years after retirement age, while women are expected to live more than 21 years following retirement, leading to a sizeable government payout. This comes as Spain has been severely hampered by unemployment. More than 9 percent of those between ages 15-64 have been looking for a job for more than a year, more than any other country measured by the OECD.
Those making the median income in government can receive more than three-quarters of their salary following retirement. That is an especially good deal for women, who are expected to live for more than 25 years after retiring at 60. This could take a hefty toll on the government, but the high employment for those aged 15-64 of 72.2 percent helps to keep these pensions funded. Furthermore, household disposable income of $27,541 is higher than any country on this list except for Luxembourg, which helps put Austria’s economy on stronger footing compared to some of its European peers.
Italians can receive a cushy pension at quite an early age. At age 59, an employee making the median income -- along with those making half and one-and-a-half times the median income -- can begin receiving a pension paying out 64.5 percent of an individual’s salary. Considering that the average woman lives to the age of 86, that is a long pension payout. Italy is the only country except for Greece to hold more debt than its GDP. The country spends 15.3 percent of its GDP on public pensions, more than any other country in the OECD.