John Rapley - Foreign FocusTHE OTHER day, US Federal Reserve Board chairman Alan Green-span said that barring either a drastic surge in immigration, or an unprecedented revolution in productivity, America's pension system was headed for collapse. Drastic reform by which he meant cuts would be inevitable.
He was echoing fears that have already been expressed in other industrial societies, from Italy to Japan, where populations are ageing and pension systems are growing unwieldy.
The principle which underpins old-age security is simple, and timeless. From the dawn of humanity, humans had children to look after them in their old age. The more children you had, the more security you enjoyed, albeit only to a point. Overlarge families diminished the investment-per-child a parent could make, in training, education, nutrition and the like. Diminishing returns thus took hold in societies with very high fertility rates.
In modern times, however, the invention of joint-stock companies and elaborate banking systems created a new way of doing things. People could invest in stocks and bonds, which entitled them to a share of a company's future earnings. In the last century, pension systems were created which exploited these markets, and in the process created a new wave of investment in the advanced capitalist economies.
But the novelty of this approach to looking after society's elderly was really something of an illusion. At the end of the day, the financial instruments being sold were really just a promissory note to the future fruits of somebody else's labour. Historically, people knew the individuals sons and daughters who supported them in their old age.
In the modern period, that task was contracted out to a pension-fund manager (whether a private fund or the state), who in turn contracted it out to the firms or bond-issuers whose stock was purchased. Pension funds, in turn, would come to invest heavily in government bonds, which borrowed against anticipated future tax revenues. Those revenues, in turn, would be produced by the labour of the next generation.
So, as pension-fund investors, citizens effectively paid others to source their future labour. Since children were no longer one's pension-fund, this lessened the value of having them, especially since the cost of raising them was rising. Obviously, therefore, fertility declined throughout the West. Initially, Western governments responded by increasing immigration.
In recent years, though, rising immigration levels have prompted backlashes, as "native" populations have felt their cultures threatened by newcomers. Some countries, like Japan, essentially refused immigrants. Others, in western Europe, have recently started moving in that direction.
But even in the United States, a country which has historically managed to assimilate vast waves of immigrants, the sentiment against immigration is on the rise.
In short, the labour force in generations to come will probably be insufficient to sustain the kinds of lifestyles to which people in the rich countries had grown accustomed. In the 1990s, a few economists put their hopes in new technology and globalisation to provide something of a remedy. On the one hand, they hoped that new production technologies - in particular, computerisation - would so augment labour productivity that society could produce more with less.
On the other hand, they hoped that the globalisation of financial markets would make it possible for fund-managers in the rich countries to invest in poor ones, essentially gaining access to the vast reserves of Third-World labour. In this rosy scenario, poor people in the Third World would get jobs and rich people in the First World would enjoy the leisured retirement they had saved for.
Today, neither scenario seems likely to come to pass. Even a new-economy enthusiast like Alan Greenspan says there is no evidence that a productivity-revolution of the sort envisioned by the technophiles will ever come to pass. And the 1990s shift in investment towards the Third World, which never amounted to much anyhow, has in recent years begun a reversal that is likely to be long-lasting.
Thus, until it is "reformed," the pension time-bomb continues ticking. The promises made in a more prosperous age will probably be impossible to keep. But, since there is no political capital to be gained from telling that truth, politicians continue deferring the matter. Eventually, though, events will take over for them.
John Rapley is a Senior Lecturer in the Department of Government, UWI, Mona.
