War between Generations

A great new social struggle is emerging in the world. The old struggle was between workers and capitalists. The new struggle is between the workers and the aged. Forget about class wars, we are now in a war between generations.

Just look at the strikes paralyzing France, the good showing of the Communists in the Russian elections, and the lay-off of government employees in the US because of the deadlock over the budget. All three events reflect, in fair measure, the growing inability of countries to provide for their aged in the style they are accustomed to.

Class warriors see these events as the revolt of the underprivileged. We have to look at today\’s problems through the prism of yesteryear. When the welfare state was first established in the West, a modest number of the affluent paid taxes to support unemployed workers. But with rising prosperity, all workers have become taxpayers, and cumulatively pay far? more taxes than do the rich. The f beneficiaries of transfers were originally the unemployed, but now the bulk of the money goes to the aged through state pensions and medical care. So taxation no longer transfers money mainly from the capitalists to workers but mainly from the workers to the aged.

Five decades ago, the aged were mainly poor, so state aid to them alleviated poverty. But the welfare state has now made the aged reasonably well-off. Meanwhile families with small children (including working families) have emerged as the new poor (children are expensive). Perversely, the welfare system now taxes relatively poor working families to support relatively affluent pensioners. Worse, the savings of workers are being dissipated by the dissaving of the aged, so not enough savings are left for investment.

The aged are living much longer, and incurring higher medical costs. Modem medicine has invented very expensive ways of keeping sick people alive. In the US, 90 per cent of a person\’s lifetime medical costs are now spent in his last six months. Old people with Alzhei-mer\’s disease and the such can require nursing for a decade or more.

In the industrialised countries, family planning plus an improved medical system has meant a rise in the proportion of pensioners and a decline in the proportion of workers. So a decreasing proportion of workers supports an increasing proportion of pensioners. In Japan today, 56 per cent of the population consists of workers, and 20 per cent are over-65s. By the year 2040, the workforce will be down to 20 per cent and the aged up to 56 per cent. So either taxes per worker will have to quadruple, or benefits per retiree will have to be cut to a quarter. Either strategy will cause social upheaval.

A quarter of all government spending in OECD countries is now on pensions, infinitely higher than their spending on the unemployed or poor. Many governments are in fiscal crises since they have borrowed enormous sums to try and maintain entitlements. In India, we think that the government\’s debt at 70 per cent of GNP is excessive. But the ratio is over 100 per cent in Italy and a whopping 140 per cent in Belgium. Even Sweden, long regarded as the model welfare state for decades, has run out of cash to support entitlements.

In France, the government\’s attempt to prune pensions and other benefits led to strikes. The protesters were not only the aged, but leftists committed to a command state and powerful trade unions determined that existing workers should get high pensions when they retire. The government has bought off the leading unions by promising not to cut their benefits, but other pensioners will not be spared. And as the population keeps ageing, further cuts (and strikes) will become inevitable.

In the US, both President Clinton and the Congress agree that entitlements must be cut, but are deadlocked on ways to do so. The real crunch, however, will come 15 years hence, when the baby-boom generation (born after World War II) retires.

In Russia, Gennady Zyuganov\’s communist party is supported overwhelmingly by those above the age of 50. The aged have been the biggest losers of the collapse of the Soviet Union, which ruined Russia\’s tax base. It no longer has the cash to maintain the old communist safety net for the aged. Mr Yeltsin initially kept entitlements going by printing money. By this simply caused hyperinflation which wiped out the value of all financial savings, causing the maximum distress to retirees. The safety nets could not be maintained by printing an ever-increasing avalanche of notes, with a cut in entitlements becoming inevitable.

Where were the cuts levied ? Mr Yeltsin wanted to avoid mass closures and unemployment. So he protected jobs (entitlements of workers) at the expense of pensions (entitlements to the aged). No wonder those above 50, repre- senting actual and imminent pensioners, voted for Mr Zyuganov.

I would welcome a Zyuganov victory in the next presidential election. Mr Yeltsin has failed, and alternative ideas must be tried. Besides, putting Mr Zyuganov in power will also expose the limitations of his own rhetoric. He can do many desirable things, like substituting mafia rule by the rule of law. But I doubt if he can expand the safety net, He lacks the tax revenue and neither are workers keen on paying higher taxes.

The problem will be further compounded by the greying of the population. The social crisis in Russia means that young people do not want children. The country had 3 million abortions last year against less than 1.5 million births. Its birth rate is now the lowest in the world, and yet infant mortality is rising. The baby shortage will translate into a shortage of new entrants to the workforce 15 to 20 years hence, when the number of pensioners will hit an all-time high.

In such countries, the war between generations will throw up not merely economic dilemmas, but moral ones. There is already growing demand for the legalisation of euthanasia (cutting off life support systems to the terminally ill). This is sometimes justified as sparing them the pain of illness. But it also cuts medical costs and, let nobody pretend this is not an issue. Earlier, the aged tended to die in their 60s. They now live up to their 80s, and expensive medical methods may soon make it possible for them to live up to a 100. Who will pay for the huge increase in living and medical costs ? Should working families spend all their savings to keep the aged alive a little longer ? Alternatively, will society say life-saving systems\’ must be switched off after spending a given quota of cash per patient? Nobody knows. And few would dare to confront the coming dilemmas.

What lessons flow for India learn from this? For the answers, read Swaminomics next week.

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