Pension provision is fraught with ethical difficulties: to take a single example, the statutory requirement of corporate “greed” of the institutions. The duty of the fund managers is simply to maximise returns for fund members, regardless of the effects of such action on others. Can one be dispassionate over such?
Projections for future pension funding generally takes into account two main factors: the reserves of state and the financial sector to fund such: and the increasing numbers of the retired to be funded.
However there is a third factor which is at least as significant in any planning, but often is overlooked: perhaps simply because it is deemed unquantifyable.
We refer to the effects of globalisation on such. This paper concentrates upon this aspect.
Globilisation: the Background
What are the basic parameters?
A precis of writings on the subject by Professors Kennedy of Yale and Jensen & Fagan of Harvard would be:
Globalisation is “the ability of any entrepreneur anywhere to get money from anywhere to build a factory anywhere to use local labour to produce anything to sell anywhere”. (Peter Jay, B.B.C. Analysis)
Much of today’s practical economics, and especially trading practices, are based upon the work done 200 years or so ago in the U.K. by Adam Smith, Ricardo, Cobden and others. These admirably suited the U.K. – and even the other dominant countries – in justifying a situation whereby the cloth made on factory looms, for example, had to be allowed to be sold without duties in the non-industrialised countries: whilst their hand-made products would cause no threat to the industrialised economies. This is the classic laissez-faire principle: “Let might prevail”.
This system allows for a much wider gap between winners and losers than in earlier times: thus during the industrial revolution in the U.K. the “landed gentry” and craftsmen lost out, whilst the industrialist and the bankers became the winners: the new rich.
The system where “sharp elbows” was the key to success caused concern to academics, churchmen and to many politicians: to the fascist leaders of the 30s as much as to the communist theorists in the first half of the 20th century. Economists saw the need for action, bringing about the Keynsian movements of the mid 20th century, which tried to level economic extremes.
However things moved on. The demise of most Marxist states brought a move to the right in most of the world’s governments. The growing freedom of money movement (now capital movements world-wide are about $5trillion p.a. – F.T. 28/Feb/13) mean that increasingly capital has the power to reward or to punish governments on financial concerns only: a government which decides to spread wealth through taxation methods might well find that it is the withdrawal of investment which then reverses this, not any concern for moral pressures by the voter.
Further, the World Trade Organisation imposes rules on fair trade as if the countries involved were on a “level playing field”: all countries are expected to have similar production costs: the country offering high wages, high social benefits etc must compete without restriction with the low wage, low social benefit country. The less well off in the richer countries will have to become worse off: whilst the less well off in the poorer countries catch up. (The cynic might well ask if the better off from either will do other than prosper…)
Some statistics on this are (2003) given by Professors Jensen & Fagan. In the “old world” there are some 250million earning on the average $85 per day; in the developing Far East 90 million averaging somewhat less than half that; but there are 1.2billion in the rest of the world – South America etc – at present expecting less than $3 per day. As the developing countries move into market economies these wages will have to move towards equalisation: the guess is that in 25 years the average income will settle to about $35 a day in real terms… After all, after a few weeks training the South American worker would be just as good as the British worker in soldering micro-chips onto printed circuit boards, etc.
There is no doubt but that this will improve the standard of living for the developing world dramatically.
But what will be the effect on the workers in the present developed world, who find their incomes halving in real terms? With the 186 economies of the world converging there will be dangers of instability if things move too fast. Even 10 years ago one noted voter appeal for protectionism from Perot, Zerinovsky, Le Paine and others. The Democratic and Republican Parties in the U.S.A. have both seen the need to beware of letting movement of policy go too fast. Possibly too, the centralising of the British political parties and the “anti-Europe” sentiments.
Hence the need for some longer term thinking and action by those more concerned with influence than with immediate action.
No economists have an answer. The simplistic one, that those in the developing world will have plenty of money to spend on products from the previous developed world is surely no answer. Coca-Cola and Ford Cars will be produced there. So will T.V.s and cameras. Other than products such as Glenlivet – or perhaps “real” Champagne – (and maybe in the short term high-tech items) what remains?
We must therefore brace ourselves: capitalism requires turbulence. We can’t hide from the future.
Whilst there have been worries about globalisation before which have not come to anything, the effects of the electronic revolution means that all is going far, far faster.
The Effect on Pensions
Given the parameters from above, which are obviously based upon the income of those in work, what will be the effect on the incomes of the retired?
If average incomes fall by at least 50%, then tax revenue from the employees should fall even further: with consequential effects on funds to pay state pensions; but so too will available income for occupational and “Private” pensions. For example, rents of shops and offices may well have to fall by at least 75%, as purchasers will demand lower prices from shops as they have less expendable cash. These reduced rents etc will mean that occupational / private pension funds will not be able to meet their obligations.
If that is the case then where will money come from to pay out pensions? i.e. how do we allow the elderly to survive: whether from state or “private” funding?
If such funding is not found then what will be the alternatives? Revolution? Neo-Marxism? Euthanasia? Or some new system?
Study required: Concept 1
The most dramatic change in industrial cost over the past 50 years or so has been from direct-labour cost to overheads.
But as the need to compete in price on the world-wide scene in the early 21st century grows: then so must the pressure on overhead costs also grow.
The most important single factor is probably the interest rate: and its resultant items: rents, leases, dividends. The use of the interest rate as an economic tool has long been considered ethically unacceptable. Practical reasons also now demand its removal.
However also of not insignificant scale are the secondary employees / subcontractors: the accountants, lawyers, advertisers, bankers etc. Just how can these overheads be reduced? And what problems follow their reduction?
Interest rates / dividends / rents etc have, of course, immediate effect on those who are dependant upon them for keeping their incomes up.
But what about the necessary reduction in income for those in the secondary, service industries: the stockbrokers, advertising executives etc? And upon those dependant upon them for work: those who repair and service the secondary homes for the well-off, for example?
Study required: Concept 2
As the problem will affect all the countries at present “more developed” – i.e. with average industrial wages over $20 per day – if it is fair to assume that one of the results might be a much higher taxation of higher incomes and wealth – then will increasingly unified taxation rates between states be required? If not, then will tax havens be continue to be tolerated as at present? Or will financial markets increasingly be allowed to determine taxation levels, etc.?
What will be the requirement for increased macro-government – such as a far more powerful and enlarged version of the European Union, to include the USA, Japan & Australasia? What will be the political possibilities of such? And if not possible, will non-participants find sanction imposition against them a probability? Would such work?
Study required: Concept 3
Education for the future: Is there a need for a re-think: to encourage above all the best of entrepreneurial requirements: the ability to ignore present restrictions – such as, for example, the dependence upon fossil fuels for transport – and encourage education systems which concentrate not upon past learning but upon devising and prosecuting new concepts: however apparently stupid such might be?
Study required: Concept 4
Agricultural costs and concepts need considerable further attention. With the very high European costs of food adding (effectively) to European wage requirements can the high price systems be sustained into the future? And with increased pressures on distribution costs (as overheads) will not the return of the cottage garden be necessary? And what are the implications of this in macro planning considerations?
Can countries with high building-land prices, such as the U.K. (and increasingly Japan) continue to have such?