European Health Worse
by John Goodman
Issue 127 - March 4, 2009

How many times have you heard that European countries spend half of what we spend and get as good or better results? How many Commonwealth Fund reports have you read, describing how health care is so much better everywhere else? Then there's that awful World Health Organization (WHO) report, which ranks the US health care system almost dead last — at least among the civilized nations.

Ah, but before you become too green with envy, read this latest National Center for Policy Analysis report. When you combine health care for everybody with an aging population and health costs rising at twice the rate of growth of income and you run the whole system like a giant ponzi scheme… well… look out!

For the benefit of our American readers, today we offer a bit of possible schadenfreude. Catastrophically bad as our unfunded entitlement liabilities are, in other developed countries things are even worse.

The study by Cato Institute scholar Jagadeesh Gokhale concludes that Europe is headed toward generational warfare. Paying benefits already promised means ever-increasing taxes on younger workers; but keeping taxes at current levels will require continued benefit cuts for retirees. As in the U.S., most of Europe's health and pension expenses for the elderly are funded on a pay-as-you-go basis. With few exceptions, no resources are set aside and invested each year in order to pay future expenses. As a result, all European countries have large unfunded liabilities — the difference between the projected cost of government social welfare programs and expected tax revenues. The cash flow problem created by these liabilities will grow over time. In general:

• The average EU country would need to have more than four times (434 percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the government's borrowing rate, in order to fund current policies indefinitely.
• At the low end, Spain would need to have almost two and one-half times (244 percent) its annual GDP invested.
• At the high end, Poland would need to have 15 times its GDP invested forever!

Unless they reform their health and social welfare programs, EU countries will have to meet these unfunded obligations by increasing their tax burdens, as the benefit obligations come due. Although spending averages 40 percent of GDP today,

• By 2020, the average EU country will need to raise the tax rate to 55 percent of national income to pay promised benefits.
• By 2050, the average EU country will need more than 60 percent of its GDP to fulfill its obligations.

John Goodman is President of the National Center for Policy Analysis