Last week, I described the emerging war between generations in the West. The western welfare state taxes workers to finance pensions and health care for the aged. But the ratio of the aged to the workforce is rising relentlessly, and will increase fourfold in some countries by the year 2040. So either taxes per worker have to be increased fourfold or benefits per retiree must be slashed to one-fourth, and neither side wants to give way. So a major conflict between workers and pensioners is brewing. This is reflected in the strong showing of the Communist Party in Russia (its supporters have an average age of 55), the strikes in France against proposed welfare cuts, and the budgetary deadlock in the USA.
What are the lessons for India? The most important one is that we must preserve the family as an institution. We must avoid well-meaning legislation of the western sort which, unwittingly, erodes the role of the family. The task of caring for the aged should be done by family members bound by blood, not by bureaucrats taxing one generation to finance benefits to another. This will be more humane, as well as more cost-effective.
The family evolved over history as an institution of mutual self-help in an uncertain world. This may not be obvious: many think the family is simply an entity held together by love and kinship. The family is all these things, but much more. It is an immensely practical insurance mechanism spreading risks between generations. You look after your parents, expecting that you in turn will be looked after by your children when you grew old. Joint families strengthen such insurance mechanisms.
In the West. state pensions and health care for the aged began as supplements to family support, not replacements. But the law of unintended consequences came into operation, and the family as an institution began to decay. The welfare state made the family redundant as an insurance mechanism, and sentiment alone proved insufficient to bind generations together.
The family has negative features as well as positive ones. The most intense power struggles take place within a family. Humiliation, jealousy, exploitation of all sorts take place in families. An astonishingly large proportion of all murders are committed by family members. Despite such strains, the financial security represented by the family system kept it intact for centuries. But once incomes rose and state welfare lowered the economic cost of breaking away from the family, this occurred in ever-increasing measure.
A further unintended consequence was the creation of new forms of poverty. In the 1980s, the poverty line for an individual in the USA was $ 7,000 per year. But for a family of four the poverty line was $ 10,000, or just $ 2,500 per head. When a family splits, living costs per head can double. This is an important reason why poverty remains stubbornly high in the USA. In the old days, the aged lived with their children. Now the aged live separately, and so workers support two separate households—their own and that of their parents. If a man is divorced and so are his parents, he may have to support four separate households-his own plus those of his father, mother, and ex- wife.
Workers in these countries believe, erroneously, that the taxes they pay during their working life support them in their own old age. In fact their taxes generally go to support the existing old folk. It is an implicit deal between generations, with workers financing retirees. When welfare for the aged was introduced, old folk obtained benefits which they had never contributed to. This was viewed at the time as a great, enlightened advance for humanity. We now know this is sustainable only if the ratio of workers to aged remains constant. With the greying of the population, it has become unsustainable.
I personally remain an advocate of the welfare state. But I now believe that the welfare slate must support only the poor and handicapped, not the aged (unless they happen to be poor too). Taxing the rich to help the poor is a worthwhile and feasible endeavour. Taxing workers to finance the aged is not.
In due course, the Indian population will age too. We must avoid the trap the West has fallen into. The state must not substitute the family in caring for the aged. Children should look after their parents, not pay taxes to the state which then hands out the money as state pensions.
Second, we must encourage people to save for their old age. Pensions are fine if related directly to the contribution of a worker to a pension fund in his working years. That way each person finances his own old age, and does not depend on the taxes of the current workforce. Provident funds and other forms of long-term saving also need encouragement. These ensure that even if a family breaks up, the aged still have something to fall back on.
The government has recently introduced state pensions for the poor. I am a little apprehensive about this. The state should certainly look after aged destitutes. But I fear that, in due course, politicians will try to extend state pensions to most or all aged folk. That will be disastrous.