UK and Holland should withdraw from EU to avoid pension insolvency obligations?

The Wall Street Journal says that most European countries are insolvent if you account for current Social Security and other government pension promises. Excerpts from a recent article:

State-funded pensions are at the heart of Europe’s social-welfare model, insulating people from extreme poverty in old age. Most European countries have set aside almost nothing to pay these benefits, simply funding them each year out of tax revenue. Now, European countries face a demographic tsunami, in the form of a growing mismatch between low birthrates and high longevity, for which few are prepared.

Europe’s population of pensioners, already the largest in the world, continues to grow. Looking at Europeans 65 or older who aren’t working, there are 42 for every 100 workers, and this will rise to 65 per 100 by 2060, the European Union’s data agency says. By comparison, the U.S. has 24 nonworking people 65 or over per 100 workers, says the Bureau of Labor Statistics, which doesn’t have a projection for 2060.

The pension squeeze doesn’t follow the familiar battle lines of the eurozone crisis, which pits Europe’s more prosperous north against a higher-spending, deeply indebted south. Some of the governments facing the toughest demographic challenges, such as Austria and Slovenia, have been among those most critical of Greece.

While a few countries—including Norway, the U.K. and the Netherlands—have considerable savings in public funds or employer-sponsored pension plans, many others have little.

Across Europe, the birthrate has fallen 40% since the 1960s to around 1.5 children per woman, according to the United Nations. In that time, life expectancies have risen to roughly 80 from 69.

In Poland, birthrates are even lower, and here the demographic disconnect is compounded by emigration. Taking advantage of the EU’s freedom of movement, many Polish youth of working age flock to the West, especially London, in search of higher pay. A paper published by the country’s central bank forecasts that by 2030, a quarter of Polish women and a fifth of Polish men will be 70 or older.

With their berry sales, the two [married Polish retirees] have a combined posttax income equal to $6,400, about 60% of Poland’s median for two people. … Her first daughter, 46-year-old Anna Mazurek, lives across the lane in Zaraszów. She teaches school—earning about $1,375 a month—cares for two children and spends many hours minding a shop she and her husband built. … Once a year, the pension plan sends her an estimate of her benefits when she retires. The most recent was about $138 a month. A spokesman for the plan said it would provide at least $224 before taxes, a legal minimum the calculator doesn’t take into account.

An hour’s drive away in Lublin, a picturesque medieval town close to the Ukrainian border, her sister, Małgorazata Olechowska, works as an office manager for an EU-funded nonprofit for about $1,600 a month. She pays at least a third of her income in taxes, including 9.76% that is earmarked for retiree pensions. Her employer chips in an equal amount. The government pays all of that straight out to current pensioners, supplementing it with other tax revenue.

Could this be what causes the EU to fall apart? Unlike the U.S., European countries don’t tax citizens who live elsewhere. So if a high-income Polish citizen moves to London, the Polish government stops getting any taxes from that person. In a world where income is increasingly concentrated in the most successful cities, countries without a London, Paris, or Amsterdam could be hard-pressed to meet unfunded pension liabilities. Those countries that have saved up, such as Holland and the UK, may be reluctant to share the pain when the EU recognizes that EU-wide taxes are necessary to bail out the various countries.

Readers: What do you think? If Europeans thought about their forthcoming day of financial reckoning would the financially soundest countries try to get out?

[Separately, the income numbers for the Polish women profiled are interesting. The sister who works in Lublin makes about $1000 after taxes. What if she read “Child Support Litigation without a Marriage,” came to the U.S. on vacation, had sex with an American, and went home pregnant? If she had sex with an American earning $250,000/year in Massachusetts, for example, she would get a tax-free $3,333/month wired to her in Poland, thus enjoying 4.3X the spending power compared to her current situation. If she saved up all 23 years of Massachusetts child support, minus $250/month for actual child-related expenses, that would be a nest egg of approximately $850,000. If such a nest egg earned a 2 percent real return starting at age 30, the result would be a $1.7 million fund at age 65. Applying the conventional “spend 4 percent per year” rule, the sister would be able to spend $68,000/year (in today’s dollars) from her nest egg starting at age 65. Thus the trip to Boston or Martha’s Vineyard at age 20 would result in a healthy child (we hope) and at least a 10X improvement in old age pension. Note that the child, once reared to adulthood and working, would improve the dependency ratio in Europe.]