Friday, April 13, 2012

Russian State Debt Lowest Among G8 Countries, as IMF warns of £750bn pensions time bomb...

Russian State Debt Lowest Among G8 Countries, as IMF warns of £750bn pensions time bomb...

Russia’s state debt is the lowest among the G8 group of the world’s leading economies and is less than 10 percent of the country’s GDP, Prime Minister Vladimir Putin said on Wednesday.

“We have a debt of less than 10 percent (of GDP), of which foreign debt is only slightly above 2 percent of GDP,” Putin said in his final report as prime minister to the State Duma, the lower house of Russia’s parliament.

Government debt globally increased 14 percent in 2008-2011, according with IMF estimates. Sovereign debt stands at almost 90 percent of GDP in the eurozone and exceeds 100 percent in the United States, Putin said.

The sovereign debt of Italy totals 100 percent, Japan 226 percent and China’s state external debt has reached almost 27 percent of GDP, Putin said.

Russia has fully recovered from the crisis and avoided a debt trap, keeping its national currency and the budget system stable. Russia’s state debt to GDP ratio is the lowest not only among the G8 Group but also among the G20 Group of advanced and emerging market economies and the BRICS member countries (Brazil, Russia, India, China and South Africa), Putin said.

Putin said Russia had become the sole country among the G8 group that posted a deficit-free budget in 2011 and even registered a slight budget surplus.

“The budget surplus amounted to almost 1 percent (0.8 percent). We don’t need to beg with an outstretched hand,” Putin said.

In comparison, Putin cited the budget deficit in the G8 group, which totaled 8.7 percent of GDP in the United States, 8.9 percent in Japan, 5.7 percent in France and 5 percent in Canada.

Russia’s international reserves mostly including gold and foreign currency topped $500 billion as of April 1, the third largest in the world, Putin said....

The IMF said yesterday that even a slightly faster than expected increase in life expectancy could impose a huge new financial burden on Western economies such as Britain. “The time to act is now,” it said.

Governments and the financial sector have consistently underestimated how quickly average lifespans will rise, IMF researchers found.

They believe it has been routinely understated by about three years, which could render public finances unsustainable, they warned.

For Britain, the IMF calculated that on the “not unreasonable” assumption that the entire cost would fall on taxpayers, the country’s public debt would rise from 76 per cent of gross domestic product to as much as 135 per cent.

In today’s money, that additional cost would be about £750 billion.

The extra costs would come from the state pension and public sector pensions, whose liabilities the Treasury recently calculated already stand at £1.13  trillion. Part of the increase would also come from the state having to rescue failed private sector schemes, which are equally unprepared for a rise in life expectancy, it added.

Latest estimates for Britain from the Office for National Statistics [ONS] suggest that boys born in 2010 will live an average of 78.2 years, while girls will live an estimated 82.3 years. Approximately a third of babies born this year are expected to survive to their 100th birthday.

The IMF highlighted research by the ONS which suggested that such forecasts suffer “widespread” errors. Projections of future life expectancy are “consistently too low in each successive fore­cast, and errors were generally large”.

As a precaution, governments should address the potential pension crisis now. The main options are higher retirement ages, higher annual contributions or reduced payouts.

An “essential” reform is an automatic link between life expectancy and the state pension age, the IMF said. This would “avoid recurring public debate about the issue”, where older workers could resist a higher pension age.

George Osborne, the Chancellor, confirmed last month that the Treasury is considering such a link, which could ultimately push the standard retirement age to 70 and beyond.

The IMF also suggested a range of “risk-sharing” measures to spread potential costs between the Government, individuals and companies.

The Government could allow pension funds to “share shortfalls with plan participants”, potentially reducing pension payments in lean years.

New financial products whose returns are linked to longevity could also be developed. Individuals could then “share the burden” by “self-insuring against longevity risk”.

Any move that raises more money for pensions is likely to be controversial with voters, but Laura Kodres, the assistant director of monetary and capital markets at the IMF, said: “The longer you ignore it, the more difficult it becomes to resolve. The time to act is now.”

The IMF’s analysis found that, although Japan and Germany are at the greatest risk of rising longevity costs, Britain and most of the Western world would find their public finances crippled if their citizens lived just three years longer than currently expected by 2050.

It said that as life expectancy rates used when calculating pension liabilities have routinely been underestimated by about three years, there is a strong chance of a pensions time bomb.

British pension funds estimate that an average male today who has managed to reach 65, will then go on to live to 86.2.

Although this is above the current official life expectancy of 82.2 years for anyone who has survived to their 65th birthday, the IMF analysis implies a life expectancy of 89.2 years for this group.

“To the extent that governments are not acknowledging longevity risk (and few in fact do), fiscal balance sheets become more vulnerable,” the IMF report said. “If not adequately addressed soon, it could potentially further threaten fiscal sustainability.” It added that longevity risks may also cripple life insurance companies and could push some into bankruptcy. Because private sector pensions are effectively backed by the state through the Pension Protection Fund, the final burden of private sector failures would fall on taxpayers.

“With the private sector ill-prepared for even the expected effects of ageing, it is not unreasonable to suppose that the financial burden of an unexpected increase in longevity will ultimately fall on the public sector,” the IMF said.

The Office for Budget Responsibility, the Treasury’s independent forecaster, has previously warned that the costs of age-related care in Britain already threaten to make public finances unsustainable, even before the risk of longer life expectancy.

The IMF’s forecasts relate only to the direct costs of maintaining pension incomes at their current levels for an ageing population, and does not include associated costs such as health and social care. The OBR has estimated that an older population could require health spending to increase by a further 5 per cent of national income by 2060....

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