San Andreas – ‘California Dreamin’. Photo: Warner Bros. Pictures/ YouTube.

If you’re already concerned about ballooning government debt levels, your anxiety levels may be about to go up a notch.

According to a new report released by Citibank, it estimates that the total value of unfunded or underfunded government pension liabilities for twenty OECD countries currently stands at a staggering US$78 trillion.

That’s US$78,000,000,000,000, unfunded, that’s owed to public sector workers. Putting that figure into perspective, something that is no easy task, it is near double the current level of outstanding government debt for those same nations of around US$44 trillion.

Yes, the same figure that has rattled financial markets for the best part of seven years is more-or-less half the size of expected public sector pension liabilities that are still yet to occur, and not incorporated into public debt-to-GDP ratios.

The infographic below, supplied by Citi, shows the scale of the impending problem that is lurking beneath the surface. The use of an iceberg is clearly symbolic of the problem governments and corporations alike will potentially face in the future.

If the graphic wasn’t scary enough to send you into a shivering wreck on the floor, Citi puts the scale of the task at hand into words.

If we focus on government pension liabilities for public sector workers and social security, our own analysis of twenty OECD countries indicates an average level of unfunded government pension liabilities of 190% of GDP. For that same cohort of countries, the reported amount of all government debt totals only 109% of GDP. In US dollar terms, we estimate global retirement underfunding sitting on government balance sheets for these twenty countries to total $78 trillion, compared to reported national debts totaling $44 trillion. Therefore, if the liabilities of social security and public sector worker underfunding are added as a form of ‘contingent debt’, total global government debt may be three times as large as people currently think it is. Whatever the calculation used, the numbers are staggering.

That would equate to a public debt-to-GDP ratio of over 300%, making the likes of Japanese government debt — currently the highest in the developed world at around 250% — look almost small in comparison.

As Citi suggests, the math is simple. The solutions are not.

“The world faces a retirement crisis,” says the bank. “However, solutions — and opportunities — are available if governments and corporations take steps to begin addressing the issues. These conversations and actions need to happen now.”

At a minimum, Citi suggests that the following needs to take place to prevent what is already an uncomfortable situation from becoming something significantly worse.

Publish the amount of underfunded governmental pension obligations so everyone can see them

Raise the retirement age

Create a new system that utilizes Collective Defined Contribution plans which share risks and benefits which is potentially better for everyone

Create powerful ‘soft compulsion’ incentives to ensure that private pension savings increase

For pension plan sponsors (corporate and public), make their full pension contributions when they are due; and

For corporations with frozen plans, get out of the insurance business

It’s an extensive list, and one that’s unlikely to be popular with workers, particularly the increase in the retirement age. However, Citi suggests that comprise from all parties will be required to ensure a fiscal disaster doesn’t ensue in the decades ahead.

“With compromise from all parties, we can make the system sustainable. Without these compromises, we are headed for disaster.”

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