The eurozone debt crisis has had a profound effect on the world economy. Countries such as Greece, Ireland and Portugal received emergency bailout money to stay afloat. Meanwhile, the U.S. government currently holds more than $15.7 trillion in debt — and lawmakers cannot agree on the best way to rein it in.
Governments end up with massive debts for a number of reasons, including government pension spending. Many of the eurozone countries that have the largest debt problems are also ones with the most generous public pensions. Greece, the poster child for the eurozone crisis, needs to find 1.4 billion euros ($1.73 billion) to fund its pensions just in 2013.
When governments are faced with pension funds liabilities, they can take short-term remedies such as allowing the pension funds to go into debt or providing tax subsidies to fill the gap, says Matthias Rumpf, chief media officer for the Organisation for Economic Cooperation and Development (OECD). Options such as the tax subsidies can have a sizable impact on government budgets. But no matter what short-term fixes governments take, “most of the problems on the pension side will return in the future,” Rumpf says.
Some of the countries on the list currently suffer from very weak economies. However, strong public pensions aren’t necessarily indicative of a weak economy. The #2 and #8 countries on the list have perfect AAA foreign currency credit ratings from Standard & Poor’s. Those two countries, along with country #4, also have long-term unemployment rates below 2%. Not every country breaks the bank to fund pensions either. The #10, #2 and #6 countries each spend less than 10% of GDP on pensions, while still providing generous pension rates.
24/7 Wall St. identified the top 10 countries with the most generous public pensions. Based on a recent report by the OECD, they examined pension replacement rates, which measures how effectively a pension system provides income during retirement to replace earnings prior to retirement. A pension replacement rate of 100% means an employee would continue to receive a full salary during retirement. The countries on the list promise to cover the highest portion of the salaries of those joining the workforce in 2010.
The OECD report published data for its 34 member countries, the majority of which are in Europe, but also include countries such as the U.S., Canada and Japan. The measurements only take into account pension policies as of 2010, which Rumpf says will likely change over time. In order to reduce their liability, many countries have already begun moving away from guaranteed pensions to defined contribution pensions instead, plans modeled off of a 401k or 403b in the U.S.
24/7 Wall St. considered a number of other factors to provide additional context: the retirement age and life expectancy for both men and women, net pension replacement rates (pension payouts after adjusting for taxes and other fees) and replacement rates for those making more or less than the median income, along with additional factors provided by the OECD to examine the fiscal health of countries.
This article originally appeared on 24/7 Wall St. on July 5, 2012.