EUROPEAN PAPERS ON THE NEW WELFARE

5. The family-Centered Welfare State

The modern welfare state that took shape in the developed countries after World War II was conceived in an era of surplus labor, when large populations of unemployed young men had been a source of unrest and violence. One need only look at the endemic civil conflicts of contemporary Africa or the Middle East to see the impacts of youth blooms on social and political stability. In the early 20th century, Europe and East Asia were mired in similar upheaval. Retirement emerged as a mechanism to open up jobs for the restless young, while giving workers a stake in long-term social and political stability. The old-age welfare state was a practical adaptation to the political and demographic circumstances of the time.

The developed world’s impending transition to a new era of depopulation and falling labor supplies radically changes this calculus. In this new environment, a social contract that directs too many of society’s resources to the old will prove socially and economically counterproductive.

Older and younger dependent populations compete for the time and resources of the productive population. Many of the aging policy reforms outlined by the Commission on Global Aging bear reexamination in this light. If society’s overriding need is to boost family formation, it may be unwise to increase the labor market or care-giving responsibilities of women in their childbearing ages. It may be unwise to raise taxes or impose savings mandates in ways that reduce the living standards of young families. At the very least, policies designed to direct more resources to the rapidly growing aged population must be designed to minimize any unintended impacts on fertility.

What might such a family-centered welfare state look like? First of all, it would fundamentally change the economics of childbearing. It would provide substantial government bonuses for early marriage, since later marriage is closely correlated with low fertility. It would give generous tax breaks, cash bonuses and in-kind support to families that have more than one child — perhaps with the biggest subsidies reserved for the third and fourth children. Greater public subsidies for education and day care would play an important role both at the household level and could aid in building national human capital for the long term. By the same token, to the extent that taxes are increased, these new burdens should fall on the childless, in recognition of the fact that children are not simply a lifestyle choice, but an essential public good. In this context, the childless are free-riders, and should bear the cost of their decisions.

Second, as the U.S. experience shows, increasing the employment status of women would make family formation more affordable. To achieve this end, women need to receive equal pay for equal work — a particular problem in Korea, which has the highest gender pay gap in the industrial world. Employers must cooperate by giving mothers greater leeway in choosing their work hours and taking time off to care for both their children and elderly relatives. Finally, there must be greater legal protections for girls and women. Of particular importance is ending the practice of sex-selective abortion, which promises to saddle Koreans with 108 men for every 100 women in 2050.

To minimize aging program costs and their adverse impacts on family formation, aging policies must center on the productive aging paradigm. Public pensions should not be provided until very late in life — perhaps until the mid-seventies — when workers are likely to be frail. Earlier retirement should be addressed through savings and disability policy. Mandatory saving programs should require workers to set money aside in order to finance retirement prior to the age of pension eligibility. Disability programs should provide pensions to older workers who become prematurely ill or disabled. And of course the oldest workers should receive special advantages, such as fewer payroll taxes and relaxed saving requirements, in recognition of the social value of productive aging.

At the same time, society must recognize that a 50 year work life requires training and educational investments in mid life. Money that otherwise might be spent on pensions should be redirected toward refreshing skills, with the goal of increasing late career productivity. Finally, while labor laws must strengthen the rights of older workers, such reforms must also recognize employers’ need to undo seniority raises when the energy or skill levels of older workers declines.

Finally, immigration can augment, but cannot substitute for, family formation in societies undergoing severe depopulation. With the birthrate that is 47% below replacement, South Korea would need to bring in hundreds of thousands of brides a year in order to restore sustainable population growth. Nor would the absorption of North Korea’s population have a meaningful effect on South Korea’s aging demographics. Although the South would account for 80% of Korea’s elderly in 2050, the support ratio of working aged to pension aged in the combined Koreans still would be a meager 1.8, versus 1.3 in South Korea alone. In addition, reunification would entail large absorption costs at the very moment when both elderly and (ideally) youth dependency will be on the rise.

Table 3

6. Conclusion

The recommendations of the Commission on Global Aging focused mainly on pension, trade and labor market reforms and, as such are applicable only at the margins to the challenges faced by the United States and South Korea. While both nations are aging, their differences are more important than their similarities. In America’s case, runaway medical inflation threatens to overwhelm all other policy adjustments and culminate in fiscal and economic catastrophe. However, if the U.S. can control health costs, the rest of its aging challenge will be manageable. In Korea’s case, severe depopulation poses an existential threat, entailing the likely collapse of its population and economy later this century.

While the Commission considered the impacts of depopulation, its recommendations centered mainly on strategies designed to preserve the old age welfare state in some version of its current form. Korea’s severe depopulation—and, to a lesser extent, that of Japan and parts of the European Union—renders this model highly impractical. Unless decisive steps are taken to boost family formation in the near term, severely depopulating societies will find themselves on a slippery slope. It is axiomatic that girls who were never born will not have children in turn. In other words, the effects of past below-replacement fertility will compound over generations. Under the existing social model, the explosion in old age dependency that is a symptom of depopulation will impose intolerable burdens on young adults in their family forming years. To the extent that child-bearing is a lifestyle choice influenced by household economics, these dependency burdens point to even lower fertility rates in the years to come.

To prevent its population and economy from collapsing, Korea must subordinate the interests of its aged to those of young adults under a family-centered welfare model, in which older populations are expected to remain as productive as possible for as long as possible. This radical departure from the postwar old-age welfare state has never been tried, but population trends in Korea and elsewhere suggest that it will soon become widespread out of sheer necessity. To the extent that Korea can pioneer the development of this model, it will provide a beacon of hope for depopulating societies throughout the developed and developing worlds.

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