Reference: Rankin, Keith (1997) "Teach your Children Well", New Zealand Political Review 6(4):8-12.
NZPR title: "Teach your Children Well"
Editor's Preamble:
Keith Rankin, 23 August 1997
There is nothing particularly complicated about retirement income.
Retired people consume goods and services produced in the present,
and not goods saved from the past. They constitute one of a number
of "nonproducing" groups who make claims on current
production. The strength of their claim as a group must be placed
in the context of all the other claims on current production.
It depends on the nature of the prevailing inter-generational
contract as to whether a generation of retired persons lives well
or poorly, relative to other claimants. This is the same in a
socialist country, or in a country wedded to laissezfaire
capitalism. It is the same whether the retirement income is claimed
through publicly or through privately contracted income transfers.
In addition to the aged, "dependents" include children,
students, homemakers, beneficiaries and rentiers. Also, people
involved in capital formation - producing goods and services which
will raise the productivity of future workers - can be classed
as dependents because they contribute nothing to the present fund
of consumables. Caregivers of children are engaged in unpaid capital
formation, investing their labour power in creating the next generation
of workers. So are students and their teachers, adding to the
stock of human and social capital.
As part of the post-war baby-boom generation, my prospects in
retirement depend on the productivity of the labour force in the
2020s, and on the willingness of New Zealand's working population
and New Zealand's creditors to be unselfish in their claims on
the economic product of that time. To maximise my generations'
prospects next century, we of middle-age should invest in our
young, whose goodwill we will depend on in retirement. A
compulsory savings scheme that comes with advantages for today's
older population - eg tax cuts and the removal of the "super
surtax" - and imposes additional burdens on today's young
is the worst possible strategy.
We will have a problem in the 2020s if:
The tone of the current dependency debate is itself counterproductive,
in that it promotes a view of the moral virtues of paid work and
a nineteenth century concept of individual and family "selfreliance";
a view that suggests people "without private means"
are second class, less deserving by virtue of their lack of adequate
personal means. By depriving the young of income, as we are doing
today - by legitimating generational selfishness - we seem to
be doing everything we can to ensure that today's young will concede
as little as possible to tomorrow's retired. This kind of policymaking
is foolish for any generation, let alone a baby boom generation
which sees itself as going to be particularly dependent by virtue
of its size.
With respect to the growth of debt and the lack of economic growth,
we need look no further for the main culprit than the Reserve
Bank, which, by inducing high interest and exchange rate profiles
over long periods, is expanding the group of advantaged rentier
claimants; domestic and foreign holders of New Zealand's financial
assets. The Reserve Bank - seeking to trade off increases in private
foreign debt for lower inflation - is reducing the long run rate
of productivity growth by raising financial costs. Even Telecom
chief executive Rod Deane has spoken out about this tendency for
monetary policy to suppress growth (news, 20 August).
Donald Brash, Governor of the Reserve Bank, is disingenuous on
the matter of the impact of monetary policy on economic growth.
In his 1996 Hayek lecture ["New Zealand's Remarkable Reforms",
IEA Occasional Paper #100], for example, he emphasises that: "While
monetary policy does affect the rate of inflation, it cannot be
used to engineer a sustainably faster rate of economic
growth or a sustainably higher level of employment."
What Brash carefully neglects to state is that monetary policy
can be used to engineer a long-run rate of growth less than the
maximum sustainable, and can be used to generate a suboptimal
level of employment. Milton Friedman, another monetarist, went
so far as to claim that the Great Depression of the 1930s was
caused by an insufficient easing of monetary policy by the Governor
of the US Federal Reserve Bank in 192930.
The average living standards of tomorrow's retired depends on
the productiveness of our investments today, and the nature of
the social contract as perceived by today's young tomorrow. Increasing
the private savings rate, per se, has nothing to do with
ensuring adequate pensions for all. Private retirement savings
only raise the claims of some members of a retirement generation
over their peers. What matters for a whole generation in retirement
is the size of the economic cake, and their ability to stake a
substantial moral claim on that cake.
How much do demographic circumstances actually affect the retirement
prospects of a generation? Winston Peters' main concerns before
the 1996 election were to secure the votes of today's old by removing
the present NZ Superannuation surtax, and to build up a national
investment fund not unlike that envisaged in the NZ Superannuation
Scheme of the Third Labour Government. However, in now opting
for a scheme more like that conceived by ACT, Peters, in order
to justify this scheme, has fallen back on the discredited claim
that universal public superannuation will become unsustainable
due to future demographic pressures.
In the late 1930s, New Zealand seemed to be facing such a demographic
crisis. A baby-boom generation, from the 1870s and 1880s, was
just entering retirement. And the birth rate, which had been falling
steadily for a number of decades, was particularly low during
the 1930s. The solution adopted in 1938 was to invest in children
and young families, by means of a universal welfare state which
also provided a mix of universal pension and meanstested
age benefit, enabling the elderly to retire in greater comfort
than ever before and to make room in the workforce for the young.
The result was that, in the two decades after World War II (1945-65),
the number of dependents - war disabled, retired, children, caregivers
- was at an alltime high, while the working age population
had been depleted by losses arising from war and low birth rates.
With the average age of retirement being much lower than in the
1930s, with many more teenagers and young adults in education
than in the 1930s, and with many more women married with young
children, just 37 percent of the population was employed in 1960.
Were these years in which the New Zealand economy ground to a
halt due to demographic pressure? Or in which inflation spiralled
out of control as too many people asked too much of our workforce?
Not at all. The economy grew at a steady four percent per annum
for two decades. All groups in New Zealand society experienced
marked improvements in their living standards compared to the
1920s and 1930s. Furthermore, there was a substantial public investment
programme, which meant that many workers were producing capital
stock for the future - schools, universities, hospitals, roads,
power schemes, airports - rather than producing for immediate
consumption. Only 30% of the population, if that, was producing
goods and services for current consumption.
We need not aspire to a 1950s' style of economy, or lifestyle.
But the experience of that decade does show us what is possible
when a nation has few "workers" and many "dependents".
Indeed, the productivity gains being made possible through long-term
public and private investment in those years meant that by 1997,
we could have been able to live at 1950s' levels of comfort with
just half a million people producing for our current needs. At
2% productivity growth per annum, a workforce should be able to
halve in size every 35 years. In fact, the workforce (the employed
plus the jobless) in 1997 equals 1.9 million, over half of the
total population. Yet many people - mainly young men - enjoy less
income than in the 1950s. The median male income as revealed by
the 1996 census is less than it was in 1956.
We appear to have squandered much of the growth potential that
our parents sought to provide us with in the 1950s. The best explanation
for our disappointing productivity gains in recent years has been
suggested by economic historian and 1991 Nobel Laureate Douglass
North, who, with John Wallis has written papers such as "Measuring
the Transaction Sector in the American Economy", and "Should
Transaction Costs Be Subtracted From Gross National Product?".
Professor Tim Hazledine at the University of Auckland is also
researching in this area. The basic idea is that workers can be
divided into "transformers" who make goods and services,
and "transactors" who finance, coordinate, manage, administer,
count, advertise and litigate.
The thesis is that in both the private and public sectors, the
proportion of transactors to transformers has grown rapidly since
the 1970s. The reasons why our economies appear so unable to adequately
support our populations lie in both the impact of the transactors
in winning resources away from transformers, and in the reasons
why the demand by government and businesses for transaction services
has grown so quickly. The proposed RSS gives us some clues. The
public and private administration costs associated with this scheme
are vastly higher than those associated with a universal public
pension. The RSS should be seen as part of a pattern of unnecessary
financial complication that just happens to create profitmaking
opportunities for transaction service providers. Today's policy
priority should be to reverse the growth of transactors relative
to producers, and not to aggravate the problem by laying an administratively
complex RSS over our administratively topheavy income support,
health and education systems.
While we know from our recent past that we can support all of
our population in a more than adequate state of comfort with well
under 40 percent of our population employed, it would nevertheless
be sensible for us to take active steps to bring about a more
balanced population structure. In 1997, the proportion of our
population aged between 20 and 65 is unusually high. We have one
"babybust" generation moving into retirement,
and another in their teenage years. Investing in our future involves
having more children, parenting them and educating them. Given
the present age structure of our population, the 1990s and 2000s
are both decades in which we should be providing incentives for
New Zealand's twentysomethings to have children, and thereby
to raise the ratio of working age to elderly persons in the middle
decades of next century.
In the absence of increased fertility over the next decade, there
should still be more than enough New Zealanders to support the
elderly. But there may be real problems if we neglect our young
by not allowing enough of them to move into responsible jobs.
We do this by clogging up the labour market with older workers
not able to retire on account of the rising age of eligibility
for NZ Superannuation, or on account of the unnecessarily harsh
terms of the 55plus unemployment benefit. Furthermore, there
is also the danger that our young will leave New Zealand in even
greater numbers than at present to pursue their working careers
in other countries. This is just what will happen if they are
burdened by compulsory savings schemes on top of student loan
repayments and low wages.
Even if we continue to neglect our young, we still cannot argue
on demographic grounds that we will not be able to afford an adequate
public pension next century. Globalisation of the economy is discussed
a lot, but rarely with respect to retirement income. The reality
of next century is that there will be a single world economy,
with essentially a global labour market and global capital markets.
That means, inasmuch as we will depend on the quantity rather
than quality of workers next century, that we should be thinking
about the age structure of the world population, which
is much more youthful than that of the "first world"
nations.
As always, market forces will allocate global labour to where
it is most in demand, though not necessarily where it is most
needed. If too many young New Zealanders emigrate, then there
should be plenty of willing immigrants from elsewhere to take
their places. If we feel uncomfortable about touting for immigrants
in the future, then we should start investing in careers for our
own young. In terms of the global issue, the biggest known demographic
event is China's "onechild" policy; a policy that
is likely to have a major impact on global migration patterns
next century, and could lead to a situation in which today's rich
nations have to compete for immigrants, just as they competed
for immigrants and "guest workers" in the 1950s and
60s.
The global economy, so long as it lacks the apparatus of a global
welfare state, is always going to be characterised by inequality.
Thus, there may well be many poor old people in the world next
century. But old age poverty will not be on account of an inadequate
supply of younger people. Rather the global fate of tomorrow's
old will be determined by the rate of investment in the world's
children today, on their attitude to their elders tomorrow, and
on the emergence of institutions that contest the de facto
sovereignty of international capital. It makes no more sense to
say that New Zealand or any other particular country faces a demographic
problem than it does to claim that regions such as Otago, Florida,
Queensland or Scotland have or may soon have too many old people
relative to younger people. All are simply regions within an imperfect
global economic order.
Because of the way nations compete for export markets and for
transnational capital, workers everywhere are being asked to produce
more while often being paid less. Their individual contributions
to the economic cake cannot be measured by their wages or by their
income taxes. All savingsbased retirement schemes tacitly
assume that individuals' contributions are measured by their earnings,
thereby legitimating the fact that the bestpaid individuals
get the most in retirement. But the reality is that most workers
contribute by accepting wages that do not reflect their worth,
or, as has traditionally been true of women, by contributing without
formal recompense. A pension should be a reward for wages foregone
in working life. But only a public pension can act in this way.
The need to recognise the contributions of those from whom "surplus
value" has been extracted - the majority of working age women
and men - is a powerful argument for a generous public pension
scheme. And it is an argument that must be sold to each working
generation in turn, to ensure that they concede enough of the
product they control to their young and to their old.
The discussion so far remains unsatisfactory, because it seems
that we depend on economic growth as well as a charitable workforce
for an adequate retirement income, yet we fear the environmental
consequences of economic growth. The key to future well-being
is productivity growth, which can mean economic growth (more goods
per person) or it can mean the creation of more free time through
shorter working lives. While it is the latter case that is obviously
more sustainable, we are in fact moving towards longer working
lives. Even the Todd Taskforce on Superannuation, which opposes
the RSS, suggests a further rise in the age of entitlement to
a public pension. This tendency to work for longer on average
must be opposed. It is overwork and the ensuing pressure on resources
that is unsustainable; not a falling ratio of young to old in
the population.
Seen from the light of a sustainable future with shorter working
days, shorter working weeks, shorter working years, shorter working
life-spans, an ageing of the population represents an opportunity
to achieve this without having huge numbers of non-workers of
working age. To put it another way, the aging of the population
gives us a great opportunity to reduce unemployment, given that
the major dependency problem at present is that of unemployment
and underemployment. The likelihood is that underemployment will
still be with us next century, despite the population projections.
The obvious solution of taking advantage of demographics to help
us achieve a reduction in the size of our workforce is difficult
to achieve, however. It requires a recognition that economic life
is not a simple matter of a workforce baking and owning an economic
cake which is shared, at their discretion and on their terms.
In a society that attributes its product to its workforce in such
a way, there will inevitably be growing tension as the employed
become a smaller proportion of the total population. In those
accounting terms, a society with a workforce of say 20% of the
population would have to rely on massive transfers from the working
to the non-working.
The solution to such a redistribution problem is not to raise
the level of employment, creating economic growth that might not
be environmentally sustainable. Rather, the solution is to think
of the economic cake as the property of everyone - of every "citizen"
- and not just the property of the employed. This approach recognises
the property rights of citizens to the fruits of their natural
and social inheritance, as well as to the fruits of their diligence
and their legitimately acquired private property. It is this inheritance
and not the labour power of today's workers that constitutes the
main ingredient of the economic cake. This approach also recognises
the multitude of current contributions in addition to paid work
that citizens make to the economic wellbeing of their society.
By allocating a citizens income as a citizens' property right
- a productivity dividend paid as a form of universal basic income
- the whole problem of having to transfer vast sums of money from
"workers" to "dependents" disappears. That
is not to say that a citizens' income would necessarily be enough
to make an adequate pension. What it does say is that the scale
of redistribution can be reduced dramatically by properly designating
our income before redistribution takes place.
Taking my argument to its logical conclusion, in a future high
productivity world where, say, only five percent of the population
are required to ensure that all live in adequate comfort, then
perhaps ninety percent of all income would be distributed as citizens
income, and the remaining ten percent would be paid to the employed
workforce.
The vision of a shrinking paid workforce reflects the kind of sustainable productivity growth we need to form a sustainable yet affluent economy. It is poles apart from Dr Brash's concept of sustainable economic growth, although even he validated the concept of growth dividends in his Hayek lecture. The move to a small "workforce" and a large "dependent" population is a solution, not a problem. The prospect of a large oldish retired population and a small young workforce is but a special case of this general solution. On the other hand, the RSS and schemes like it represent attempts to fix the solution by creating a problem.
 Return to Keith Rankin's page |