Tuesday, June 23, 2015

Grecian Formula (for Economic Disaster)

If you are investing for your retirement you may have noticed your nest egg has been performing rather sluggishly lately.  Part of that is due to continued weakness in the economic recovery--but a major cause is concern about the future of the Eurozone.  Specifically, investors are worried about Greece possibly leaving the economic union and defaulting on billions of euros worth of debt owed to other members. 

The Greek issue centers upon the country's generous pension program--their version of Social Security.  Until recently, a Greek resident could retire at 57 and collect a federal pension as high as 75% of their salary in the five years before they left the workforce.  It was a benefit Greeks had basically voted themselves--electing left-leaning Socialist governments promising more and more things for "free" for decades.

But then, the enemies of Socialism--Math and Economic Reality--struck.  The European real estate bubble burst around the same time as the US housing market tanked--and Greece's economy (based largely on tourism and service industries) was left in ruins.  The Greek pension system represents a whopping 17% of the country's gross domestic product--and was projected to increase to 25% in the next 20-years.  By comparison, Social Security represents just 5% of the United States GDP.  The "evil" Germans (the only country in the Eurozone with any money) offered to bail out the Greeks--but only if they scaled back their retirement benefits--just like Chancellor Angela Merkel had successfully done to ease the financial crisis in her country.

At first, the Greek government complied.  The retirement age was raised and the benefits packages were reduced--and it looked like the crisis was averted.  But the Greek voters didn't like giving up the "free stuff" that they thought they "deserved"--so they voted the politicians who agreed to the bailout terms out of office and elected even more hard-core Socialists who promised to tell the Germans to stick austerity where the sun don't shine.  But wouldn't you know, our old friends Math and Economic Reality were going to triumph over the Big Government Nanny State again--as the Leftists realized that dropping out of the EU and going it alone with their Drachmas would be akin to national suicide.  And so they are back at the table this week--hats in hands--offering to honor the bailout agreement with a few adjustments.

It's just unfortunate that Joe and Jane Sixpack here in the US will have to work a few more weeks or months before taking our privately-funded retirements due to the bear market just so Nikos and Athena can take a couple of years off of their government-funded Golden Years.

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