Last week I blogged about what Greece meant to the European Union (and thus the world) and I believe it is necessary to provide an update to what is happening before continuing on to another topic. As a result of Greece’s necessary steps to reduce it’s budget deficit by €4.8 billion through increasing taxes and reducing government spending, the market has begun to stabilize in Europe with the expectation that Greece will not fail. On Thursday, one day before Greece’s Prime Minister George Papandreou is scheduled to meet Germany’s Chancellor Angela Merkel, Greece was able to raise a 10-year €5 billion bond offering that was three times over-subscribed. The capital raise is a good sign that confidence is returning to Greece. However, Greece still has a lot of ground to cover and it will only be able to do so with a blessing of the European Union. It is a tragedy that Greece and other European countries (with the help of Goldman Sachs) had to hide their large debt burdens in order to be a member of the Euro currency community, but that’s a separate issue.

The looming multi-trillion dollar question here is one that carries significant impact around the globe. And that is the question of what to do with unfunded entitlements? Countries and companies are facing extremely large unfunded liabilities, especially in the current economic climate. Lower revenues and increasing pension and healthcare costs are placing significant stress on the current system and on future generations. Fundamentally, if pension plans cannot pay for themselves, they could potentially fail if there is a shortfall in expected revenue. Private pensions are largely linked to the stock market and can be heavily weighted in an employer’s stock and thus more at risk of a downturn when the economy enters into a recession. In many larger corporations, the company matches or contributes to your retirement plan. Typically, a contract is entered into where the company has an obligation to meet a specific financial contribution. Pre-bankruptcy General Motors’ pension scheme cost the company an average of $3,000 more per vehicle built than that of their competitors, which in the end, is essentially what drove General Motors to bankruptcy. Over the previous two decades companies have had relatively easy access to credit markets, which allowed them to borrow in order meet their pension obligations. But, times are changing and even US states and countries, especially developed countries, face similar crises with increasing pension obligations and a declining tax base.

A recent report released by Pew Research, indicates that US states face at least $1 trillion shortfall for their pensions and retirement benefits. These systems need to be dramatically reformed in order to save states from holding themselves financially hostage. The state of California is the best example of the state of affairs that is crippling governments from providing education, security and healthcare funding. And without dramatic legislation, taxes will have to be significantly increased and a dramatic reduction in social services will have to be implemented. Local governments will be forced to embrace pension-reducing policies, which will be a policy that will hurt their own pockets. The longer they wait the larger the problem will become.

On the federal level, the US Government is facing growing Social Security, Medicare and Medicaid costs that are expected to consume 56% of total budget outlays in 2011. If nothing is done to curtail meaningful expenditures or increase the tax base over the long term, the US Government could potentially face a similar problem to that of Europe and governments around the world will be forced to make the decisions that Greece has had to make.