The hot policy debate of the moment among economists and politicians is whether debt matters. Debt doves are mostly right; the current deficits most nations are running probably won’t blow their finances out of the water. However, there’s another, hidden source of debt that might: government pension obligations. As pension liabilities grow and populations age, the payments governments owe current and past employees threaten to crowd out other spending for things like schools and roads, and could make even reasonable debt levels unsustainable.
Pensions with defined benefits still make up a significant share of many retirees’ income. Even as corporate pensions have become rarer in the US and UK—replaced by defined contribution plans like 401(K)s—defined benefits plans still exist, for local public sector workers and the 59 million Americans who receive Social Security each month. Most European governments also continue to offer defined benefits to their citizens after they retire. Pensions are already a big part of state spending globally. In Brazil, one third of tax revenues go to pension benefits (paywall), and the share is growing elsewhere. The figure below illustrates how much pensions take up of GDP in industrial countries.