Social Insecurity

Why an increasing number of countries are turning to market-based pension plans

Opponents of liberal, market-oriented economic reform are fond of declaring that theirs is the cause of "social cohesion." First among globalization's many sins, they claim, is that it frays the bonds that hold communities together. Globalization destroys the connections that lift us above our narrower interests and embrace us all, rich and poor alike, in a greater whole. The frenzy of unchecked competition, the argument goes, has set one group against another while leaving the neediest and most vulnerable to fend for themselves.

There is nothing new about such attitudes. The belief that market competition alienates and atomizes was never expressed with more passionate ferocity than in Karl Marx and Friedrich Engels' The Communist Manifesto. Only two years after England repealed its protectionist Corn Laws and embraced full-fledged free trade, Marx was already proclaiming the socially corrosive effects of nascent globalization:

"The bourgeoisie...has left remaining no other nexus between man and man than naked self-interest, than callous 'cash payment.' It has drowned the most heavenly ecstasies of religious fervour, of chivalrous enthusiasm, of philistine sentimentalism, in the icy water of egoistical calculation. It has resolved personal worth into exchange value, and in place of the numberless indefeasible chartered freedoms, has set up that single, unconscionable freedom -- Free Trade."

How does such thinking fit into today's historical context, now that Marx's dreamed-of future has come and gone? For a century, the collectivist, centralizing impulse worked to shape the goals and instruments of social policy. Now much of that work is coming into question. For partisans of social cohesion, the shoe is now on the other foot: Where once they fought in the name of alluring, untested possibilities, today they must defend existing and increasingly dilapidated structures from criticism and reform. They have transformed themselves from reformers and revolutionaries into conservatives and reactionaries.

The rearguard defense can be seen vividly in the fight over the centerpiece of the 20th century welfare state's attempts to centrally manage in the name of social cohesion: traditional social insurance programs. It is increasingly apparent that such policies are doomed to collapse and need fundamental rethinking. Blind resistance to that rethinking will only further rend the social fabric.

Behind the appealing rhetoric of unity, the contemporary anti-liberal agenda is deeply divisive: It pits the privileged beneficiaries of current policies against their more numerous but less visible victims. It sets current pensioners against the young and middle-aged whose hopes for retirement security are imperiled by the defects of current pension systems.

Critics of globalization argue that the spread of markets is undermining social cohesion by compromising national governments' ability to tax (and thereby fund) the social safety net. "The increasing mobility of capital has rendered an important segment of the tax base footloose, leaving governments with the unappetizing option of increasing tax rates disproportionately on labor income," according to Harvard University economist Dani Rodrik in Has Globalization Gone Too Far? (1997). "Yet the need for social insurance for the vast majority of the population that remains internationally immobile has not diminished. If anything, this need has become greater as a consequence of increased integration."

It is difficult even to take seriously the proposition that, whether because of globalization or otherwise, the governments of industrialized countries are hurting for tax revenue. Between 1965 and 1998, while globalization was supposedly eroding rich countries' tax bases, average total tax revenues as a percentage of GDP rose for Organization for Economic Co-operation and Development (OECD) member countries from just over 25 percent to well over 35 percent. There is, in short, no evidence whatsoever that national governments lack the resources to fund appropriate social policies.

Meanwhile, the notion that globalization has increased the need for social insurance does not square with the facts. The theory behind the notion is that international integration increases the risk of dislocation (and thus the need for the safety net) in those sectors of the economy exposed to international competition. But the majority of social spending goes to senior citizens who are retired from the work force; their exposure to the slings and arrows of foreign competition is nil.

It is undeniably the case that the welfare states of the advanced countries are now under severe fiscal strain. But if market forces are not the culprit, what is? The social safety net has been badly frayed, not by any pressures of globalization, but by the collectivized, top-down nature of traditional social insurance. At the heart of the problem are enormous, monolithic public pension systems that violate the most basic precepts of actuarial soundness. Those systems are primarily responsible for the welfare state's mounting financial woes.

Roots of Dependence

The founding father of collectivized social insurance, German Chancellor Otto von Bismarck, was brutally candid about the political benefits of centralization. As ambassador to Paris in 1861, he had seen how Napoleon III used state pensions to buy support for the regime. "I have lived in France long enough to know that the faithfulness of most of the French to their government...is largely connected with the fact that most of the French receive a state pension," he recalled later. For Bismarck, the appeal of social insurance was that it bred dependency on, and consequently allegiance to, the state.

Social insurance was thus born of contemptuous disregard for liberal principles: What mattered was not the well-being of the workers but the well-being of the state. With that animating principle, social insurance necessarily assumed a collectivist character. In particular, it would clearly not do simply to compel workers to provide for their own retirement; funded pensions that actually belonged to the workers would not inspire the proper feelings of dependency and subservience. Far better was the "pay as you go" system in which the government would transfer funds directly from current taxpayers to current retirees.

When such ventures are attempted in the private sector, they go by the name of pyramid or Ponzi schemes and constitute criminal fraud. The essence of a pyramid scheme is that investors' money is never put to productive use; it is simply diverted to pay off earlier investors. As long as new victims can be found, everything seems to work fine. Eventually, though, the promoters of the scheme run out of new investors, and the whole house of cards collapses.

Pay-as-you-go public pension systems operate in precisely the same way. As long as the contributions of active workers are sufficient to cover payments to current retirees, the system is fiscally healthy.

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    the problem with privatizing pensions is that it forces workers to pay into a system that exists to make the fund managers wealthy and that puts their pensions at risk. Witness the current financial collapse. If pension systems are ponzi schemes, privatization is musical chairs meets a game of dice if you're lucky to reach retirement during a boom economy and can transfer your wealth out of the dice game... you win. Otherwise, suck it up 80 year old and start pushing those carts at Walmart. Uh... no thanks.

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