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Case for a Global Pension and Youth Grant

Given that global population projections indicate a manifold increase in the ageing population and that this is a group where poverty is highly concentrated, there is a case for setting up a global pension fund. Financial help should also be extended to another disadvantaged cohort - young people. How can such a fund be set up?

Insight

Case for a Global Pension and Youth Grant

Given that global population projections indicate a manifold increase in the ageing population and that this is a group where poverty is highly concentrated, there is a case for setting up a global pension fund. Financial help should also be extended to another disadvantaged cohort – young people. How can such a fund be set up?

ROBIN BLACKBURN

T
he universal, publicly financed, old age pension has been a popular and effective means for reducing poverty and extending social citizenship in all developed states. In the age of globalisation, it is right that the old age pension, this tried and tested device for protecting the livelihood of the elderly, should be installed at a global level by means of a pension paid at a modest rate to all older persons on the planet, to be financed by a light tax on global financial transactions and corporate wealth.

In the first instance, the global old age pension could be set at one dollar a day, bearing in mind that such a small sum would help lift hundreds of millions of the aged out of poverty. Poverty is still strongly associated with old age, and especially with gender and old age. State pension schemes greatly help limit old age poverty in the developed world but have not abolished it, while in developing countries, pension arrangements often reach less than half the population. The usual link between pension entitlements and employment contributions is not good for women. Because women live a few years longer than men, the majority of the elderly are women. And because women’s unpaid labour in the home counts for little in public pension systems, and for nothing in private and occupational schemes, over three-quarters of the elderly poor are female. Moreover, the woman’s work of caring for other family members typically continues in old age, as she cares for her spouse, grandchildren and the sick. In countries afflicted by HIV/AIDS, older women are essential to family survival as they take on their children’s parenting role. If a reliable way could be found to channel 30 dollars a month, or 90 dollars a quarter to the aged in developing countries, this would not only massively reduce poverty but also put resources in the hands of those who could make good use of them.

In richer countries, there are still stubborn pockets of poverty among the aged, especially older women. As the older population grows in size, and employers and the state cut back on provision, these pockets of poverty increase. A cheque for $90 a quarter would not banish poverty in advanced countries but it would be welcomed by many of the elderly, making a modest but useful contribution to their straightened budgets.

There are some 560 million older men and women in the world today, that is persons over the age of 65 years in advanced countries and over 60 years in the developing world. The cost of introducing a global pension of a dollar a day in the next few years would be around $205 billion a year, one-fifth of the projected cost to the US of the Iraq war or one-half of the annual US military budget prior to the Iraq invasion. However, the cost of the proposed pension will double by around 2030, and treble by mid-century. Ageing is going to climb steeply in the coming decades because of rising longevity and falling birth rates. These trends are not confined to rich countries. Just as urbanisation occurs with or without economic development, so does ageing of the population. While the former process is leading to “a planet of slums”, the latter is making for a global blight of destitution in old age.

By 2050, the UN population division expects there to be two billion persons aged 60, or over worldwide, with 1.6 billion of these in less developed countries.1

Ageingis most marked in Europe and Asia but it is advancing elsewhere too. By 2050, the size of this older group in Africa is set to quadruple to reach 207 million, comprising 10.3 per cent of the total population. Africa will have more older persons than Latin America and the Caribbean (with 187 million aged 60 and over), and nearly as many as Europe (with 229 million of that age). By 2050, Asia, a category that includes India and China, is expected to have no less than 1,249 million older persons, comprising a fifth of the total population in India and as much as 28 per cent in China.

It is often claimed that the ageing of the population can be offset by immigration. The projections I have quoted assume the continuation of current trends in migration. While migration flows can temporarily mitigate the ageing effect in recipient countries, they cannot, of course, reduce the ageing of the global population.

Today, women comprise 55 per cent of those aged 60 and above worldwide, 65 per cent of those aged 60 plus in north America and 70 per cent of those aged 60 plus in Europe. Worldwide women comprised 63.5 per cent of those aged 80 and above in 2005, a figure that is expected to drop slightly to 61.4 per cent by 2050. The frail and vulnerable “old old” are the most rapidly growing age cohort in all parts of the world. There were 88 million persons aged 80 and above worldwide in 2005, a figure that is projected to rise to 402 million by 2050 according to the UN population division mid-range projections.

The ageing trend will already be evident long before 2050. India’s over-60 cohort will number 175 million by 2024. By 2040, there are expected to be 98 million persons aged 80 plus in China, 47 million in India and 13 million in Brazil. These people are all already born, a circumstance that gives the projection a high degree of probability.

There are very few countries in the world, which have arrangements adequate to the rising future need for the care and support of the elderly. In poor countries, the aged are often sunk in absolute or extreme poverty, while in the richer countries they suffer from relative poverty. As aged populations double or treble, both these problems will grow. Worrying as is the economic outlook for the elderly in most

Economic and Political Weekly July 21, 2007 of the Organisation for Economic Cooperation and Development (OECD) countries, the situation is, of course, worse in the former Soviet Union and much worse in many parts of Asia, Africa, and Latin America where the aged in the countryside and slums often have no coverage at all

– circumstances, which could themselves supply their own grim corrective to the assumption that recent improvements in life expectancy will be maintained.

According to one estimate, formal retirement income schemes cover fewer than 15 per cent of the world’s households. Even countries like India and Chile, with growing economies and considerable administrative capacity, fail to deliver basic pensions. Chile’s pension system has been held as a model, yet it leaves 40 per cent of the population entirely uncovered, and furnishes weak coverage to another 40 per cent. India’s old age pension is a means tested and amounts to only $2 a month for those able to claim it. While poor urban dwellers are not poor enough to make a claim, poor rural dwellers find it too costly.2 As populations age further, this places great strain on the elder care arrangements in family and kinship networks.3

Poverty and inequality are so great in today’s world that quite modest remedial measures can have a large impact. There are 2.5 billion people living on less than $2 a day, with the majority of the elderly falling within this category. Meanwhile, the richest 10 per cent command 54 per cent of global income. In this “champagne glass” world the well-off sip at the glass’s brimming bowl, and the impoverished or struggling remainder supply the slender stem. In such conditions, a dollar a day is less than a rounding error to the wealthy, yet would be a lifeline to the global aged poor.

Plight of Old and Claims of Youth

In urging the case for a global pension I do not mean to slight either the humanitarian approach, which simply prefers to urge the claims of bare humanity, or the efforts of those who campaign for the need to alleviate the problems and poverty of specific groups, such as young mothers or AIDS’ sufferers. In the unequal and strife torn world in which we live there are several ways in which poverty may be overcome. Peace would be the best help for the very poorest in strife torn lands. Then there is successful economic development, such as that in China and India over recent decades, which will lift many out of poverty and furnish a more hopeful context in which to advance anti-poverty strategies. But the weakness of provision for the elderly in these countries also shows that even – or especially – the most rapid growth may not banish absolute poverty in the countryside or new urban centres.

A global pension could command support in ways that would extend the general case against poverty. In richer countries, there is a fear of pension failure at home, and concern at the worse plight of the very deprived in poor countries. In developing and underdeveloped countries, there is the more specific alarm or guilt that is occasioned by poverty, actual or impending, of parents, grandparents, uncles and aunts. Such sentiments helped generate support for old age pensions in developed states in the past and are likely to do so again in the developing world. A global old age pension, if it could be realistically financed and delivered, would enjoy substantial legitimacy and would in no way detract from other efforts to combat relative or absolute poverty. I suspect that this is already the case but that legitimacy can only grow in an ageing planet. Today, the majority of the old are poor, tomorrow the majority of the poor may well be old.

While we must help the aged, I believe it would be wise also to extend similar help to the other age cohort which is typically excluded – young people. The global pension should be twinned with a youth grant. Older people themselves would feel happier to receive a pension if financial help was also available to the young, especially the sort of help that would allow them a better start in life. Today, one-half of those aged between 16 and 24 years are unemployed – not in a job and not receiving education – and thereby, at special risk of being in poverty both now and in the future. If we set aside a small privileged minority in both categories, there is reason to see young adults and the elderly as the excluded generations. The cost of supplying every younger person with $1,500 for educational and training purposes on reaching the age of 17 would be very similar to that of paying the global pension of a dollar a day. A youth grant would widen access to the knowledge society and symbolise a concordance of the generations. While it could transform the possibilities of the young persons in poor countries, it would still be welcome to most of the young in wealthier lands. Young people are now greatly burdened by the rising cost of education and acquiring skills. They also tend to keenly appreciate any extra modicum of independence from their parents. Even in some of Europe’s most advanced welfare states, such as Sweden, young people living on their own figure disproportionately in the poverty statistics. The case for special help to the young is now so widely acknowledged that it does not need further pleading here.4 The question remains how could financial help to the “excluded” generations be financed?

How to Pay

I have explained that only $205 billion a year would be needed, to begin with, for the proposed global pension. But it would be necessary to reckon with the need for more than doubling revenues within a generation and the building of a substantial fund now, while ageing effects are still comparatively modest to help finance extra pension pay outs in the middle decades of the century. Moreover, there should be a commitment to raise the global pension in line with the growth of overall average incomes so that the old share in future prosperity.

Raising the necessary finance for a global pension – together with something extra for administrative costs – will certainly require a serious effort. The fiscal devices adopted should ideally relate to the workings of the global economy taken as a whole so that there will be a wide and dynamic tax base.

Three types of impost are peculiarly well suited to such a task: a tax on international currency transactions, tax on fuel used on international flights and very mild tax on corporate wealth. The calculations which follow are simply rough-and-ready exercises designed to establish that the pension and grant can be easily financed by the proposed taxes, and have the further benefit of shedding much needed light on international financial flows.

The famous Tobin tax applies to the sale or purchase of currencies and has been advocated as a measure to curb currency speculation.5But it could be applied mainly as a revenue raising measure. Set as low as 0.1 per cent – or one-thousandth part of each transaction – the tax would not be worth evading but would still raise large sums globally. Common estimates of the amounts that could be raised each year from a Tobin tax on currency transactions ranged from $100 billion to $300 billion in the late 1990s. By 2010, the Tobin tax yield should comfortably reach the higher end of this scale – $300 billion.

Here, I suggest that an income of around $150 billion be earmarked as the Tobin tax

Economic and Political Weekly July 21, 2007

contribution to financing the global pension, with the remainder to be dedicated to young adults – the young could be offered a lump sum grant of $1,500 to use for education or training when they reach the age of 17. Small as this sum would be in richer societies, it would not be a negligible one. Twinning the global old age pension with help for young people would begin to assert a new balance between life stages in a scheme of generational equity. However, such a justified sharing of Tobin tax revenues would mean that another source of funds would be needed for the global pension, especially as the ageing of populations grows in the future.

At present, the fuel used on international flights is almost untaxed and costs airlines about $50 billion a year. A doubling of the price of fuel might help cut consumption by a fifth or a quarter while still raising $30 billion. However, much of the yield from green taxes should be used to invest in other measures designed to mitigate global warming. But tying at least some of the revenue

– say a half of it – to a universally recognised good cause would be defensible. While $15 billion a year would be a help, other sources of revenue would still be needed.

The third source of revenue I propose is a mild levy on share values or share transactions. There could be a requirement on all companies employing more than 50 employees or with a turnover of more than $10 million, to pay a tax of 2 per cent on their annual profits in the form of either cash or in the case of public companies, by issuing new shares of that value to the fiscal authority (private companies could issue bonds and partnerships, private equity partnerships, could issue nominal partnership rights). All genuine pension funds would be compensated for the impact of share dilution on their holdings.6

Two important features of these arrangements should be noted. Firstly, they would apply to profits made anywhere in the world. Secondly, companies would be able to discharge their obligation simply by issuing a new security rather than by subtracting from their cash flow.

The profits tax/share levy would be at a very low rate – a tax of 2 per cent of profits should raise about $140 billion annually. Although modest, this tax could be awkward for some companies, and especially in some conditions if it has to be paid in ready cash. The use of a general share levy to establish reserve social funds is associated with the work of Rudolf Miedner, the chief economist of the Swedish trade union federation, the LO, and architect of the Swedish welfare state. Even the very small payments that are meant to be paid by corporate sponsors to the insurers of their “defined benefit” pension schemes have caused difficulties in recent years in the US and UK. In the US, the courts have required companies in difficulties to contribute to the Pension Benefit Guaranty Corporation by issuing new shares in lieu of cash. In the UK, the Pensions Regulator has made similar provisions relating to the Pension Protection Fund.7 Employees will stand to qualify for the new pension but would certainly welcome a contribution that does not weaken their employer in any way.

The share levy I have briefly sketched has been set at a tenth of profits but this is simply a convenient way of measuring a company’s operations and might need to be supplemented by other metrics to avoid distortions aimed at evasion. The share dilution brought about by the levy means that even funds in tax havens would not be able to escape.

Before returning to calculations of the contribution of a share levy to financing the global pension, I would like to mention a financial tax that has a long history, and has been highly successful, namely stamp duty, a tax on share transactions. Stamp duty in the UK shows that a very modest charge on a large volume of transactions can yield large sums at a low cost and without harmful side effects. Levied at a rate of 0.5 per cent of share transactions (other than the use of a general share levy to establish reserve social funds is associated with the work of Rudolf Miedner) the UK stamp duty raises over $5 billion annually. While derivative contracts pay no stamp duty, any sale of underlying shareholder assets does attract the tax. The Confederation of British Industry, a business lobby, argues that the stamp duty is weakening London’s position as one of the world’s leading financial centres. But the thriving state of London finance belies the argument. The UK treasury is anyway greatly attached to an impost that is easy to collect – this is done at very low cost as part of the central share settlement system. China’s financial authorities have a similar device which they use in a “Tobin tax” way to dampen speculation – but it also raises large sums.8 Several European states, including Switzerland and France, have similar very mild imposts applying to bonds as well as shares. In case of any shortfall in the yield of the taxes already suggested, or of implementation difficulties, a global stamp duty or financial transaction tax (FTT) could be looked at to fill the gap.

It may be recalled that a half share of the Tobin tax already raises $150 billion towards the global pension, and that the fuel tax on international flights should further raise $15 billion annually. Thus, to begin with, an extra $40 billion a year would be needed from the share levy (or share transaction levy), to meet the immediate annual cost of $205 billion. This would allow the remainder of the sum raised by the share levy on profits – $100 billion each year – to accumulate in the global pension fund (GPF) network as a strategic reserve pledged to meet the anticipated rise in the numbers and proportion of the aged. The various taxes would be collected by national fiscal authorities with assistance from appropriate international bodies such as the International Monetary Fund (IMF) and International Air Transport Association (IATA). Revenues would be paid to the global office of the GPF for consolidation with the world fund.9 Consolidation of assets by an international agency would ensure a highly diversified portfolio but the agency would itself be required to distribute the assets it receives to a global network at regular intervals. This regional network of around a thousand local offices of the GPF would be responsible for paying the pension and would receive resources in line with their region’s demographic characteristics. In the interests of building up its reserves, the GPF network would use its cash revenue to pay out current pensions but hold all the new shares and other securities to generate larger revenues in the future when they will be needed.

Global Network of Reserve Funds

During an initial accumulation phase it might be wise to re-invest dividend income in public bonds. Because the GPF network would not buy or sell shares, it would have less scope for making mistakes. The knowledge that the GPF network would not sell the shares it holds would also be a factor of stability and prevent it from financially harming the companies in which it had stakes. By around 2034, total assets in the GPF network could amount to $7.7 trillion.10 If cash payouts began at this time, and the annual yield on capital was around 3 per cent, this would be $257 billion for that year. Each regional office would hold abound $7.7 billion in assets and receive $257 million in revenue. Note that while dividend income can fluctuate,

Economic and Political Weekly July 21, 2007 it is less volatile than share price, and there are ways of smoothing such receipts.

The global pension would be a universal scheme benefiting everyone who reaches old age. The receipts of the currencyexchange tax and levy on profits would obviously be larger in rich parts of the world than in poor ones. However, currency transactions and corporate profit trails often involve tax havens and developing states where income per head is still low. The currency tax and profits tax would be light but they would apply everywhere. The overall workings of the global pension

– if financed in the way suggested – would redistribute from the rich to poor. On the other hand the participation of every territory – no matter how small or poor – would be essential to the effective workings of these levies.

Citizens of richer countries should be pleased at the comprehensive scope of the new arrangements, which would require potential or actual tax havens to report currency movements and profits at companies they allow to register in their territory. The global pension would give those in richer countries rights to a modest pension supplement, and as a flat rate benefit would help the less well-placed more than the comfortably-off everywhere. It would do most to reduce poverty where it is worst – in the countryside and neglected urban areas of the underdeveloped and developing world. Last but not least it would promote more transparent and responsible corporate behaviour and nourish a worldwide organisation dedicated to social welfare.

The regional network of funds would be bound by actuarially fair rules of distribution and would be required to hire professionally qualified personnel but should also furnish democratic representation to local communities. The holding of stakes in a great variety of companies could, in principle, give the regional network a say in how these shares would be voted. The impact of the network on the management of any given company would be very small but they would be able to influence issues of general principle, such as respect for labour rights or compliance with environmental standards. The network could comprise, as suggested above, around 1,000 offices worldwide, each catering to a population of about six million. The network would give a say to local communities who are often ignored by large corporations.

However, the primary duty of the regional and national network would be to organise the cheap and effective disbursement of the global pension to all who qualified for it. In many countries the task could be sub-contracted to the national pension authorities. Where these still had weak coverage assistance might be sought from – and costs shared with

– post offices, local microcredit unions and public sector employees’ schemes. The latter exist in many countries where national administration is ineffective or even non-existent. Namibia has developed effective means for delivering old age pension, employing mobile automatic teller machines activated by fingerprint identification.

The global pension would be a universal social insurance scheme, not an aid programme. It would channel financial resources direct to the elderly in communities whether rich or poor, urban or rural. The costs of administration would, as far as possible, be spent in those communities. Administration costs should amount to no more than 1 per cent of the fund each year, and quite possibly, less. It would be a nonmeans-tested as well as non-contributory “social pension”. Requiring pension recipients to undergo a means test is demeaning and discourages the poor from savings. It can easily stigmatise the elderly, especially older women.11

The global pension would contribute significantly to “security in old age” envisaged in Article 25 of the universal declaration of human rights. UN agencies and conventions have helped focus global attention on the problems of children, women, sick and disabled. In 2002, the UN sponsored the Second World Assembly on Ageing in Madrid, which issued good advice to member governments, but, as yet, the plight of the aged and the prospect of a surge in their numbers are still not addressed by a specific international agency or by a programme with a global scope. The global pension would represent a tangible step in the right direction. It would help build equality on a firm basis, from the ground up and do so in ways that foster a wider pattern of social responsibility. India is, perhaps, well placed to further the proposal. It faces an ageing problem. It disposes of great financial expertise. And its progressive forces are still influential.

EPW

Email: roblack@essex.ac.uk

Notes

[This paper is based on a presentation given at an event organised by Global Action on Ageing at the United Nations building in New York on February 14, 2007, for the benefit of those attending the concurrent meeting of the UN Economic and Social Council.]

1 These estimates are taken from the 2006 revision to be found on the web site of the UN population division.

2 The yawning gaps in pension provision are well documented in Larry Willmore, ‘Universal Pensions in Developing Countries’, World Development, Vol 35, No 1, 2007, pp 24-51. For India see Rajeev Ahuja, ‘Old Age Income Security for the Poor’, Economic and Political Weekly, September 13, 2003.

3 A strain described in Jeremy Seabrook, A World Growing Old, London, 2003.

4 The special claims of youth are urged by Bruce Ackerman and Anne Alstott, ‘Why Stakeholding and Macro-Freedom’ in Bruce Ackerman, Anne Alstott and Philippe Van Parijs (eds), Redesigning Distribution, London 2006, pp 43-68, 209-16. A policy for a type of youth grant is also made by Roberto Mangabeira Unger in his book, What Should the Left Propose?, London 2006, pp 43-67. For information on youth exclusion see the World Bank’s Annual Development Report 2007, Development and the Next Generation, Washington 2007.

5 For the Tobin tax see James Tobin, The New Economics, the Elliot Janeway lectures in honour of Joseph Schumpeter, Princeton 1974; J Frankel, ‘How Well Do Foreign Exchange Markets Function: Might a Tobin Tax Help?, NBER working paper no W5, Cambridge, MA 1996; Keiki Patomaki, The Tobin Tax: How to Make It Real, The Finnish Institute for International Affairs, Helsinki 1999; Joseph Stiglitz, Globalisation and Its Discontents, New York, 2004.

6 The general share levy feeding reserve social funds is an idea developed by Rudolf Miedner (1913-2005), the chief economist of the Swedish trade union federation, the LO, and architect of the Swedish welfare state. I supply a fuller account of its workings in the sixth chapter of Age Shock.

7 I give examples of this court-mandated share issuance inAge Shock: How Finance Is Failing Us, London and New York 2007, pp 134-35,

142. The judges were no doubt in part prompted to take this measure because of records of corporate irresponsibility which I document in Chapters 2 and 3 of this book.

8 See Geoff Dyer and Jamil Anderlini, ‘Beijing Could Reap $40bn Share Tax Bonanza’, Financial Times, June 4, 2007.

9 The GPF might maintain offices in such important financial centres as Zurich, Cyprus, Mauritius, Singapore, and so forth chosen with a view to strengthening compliance.

10 I am assuming that profits rise at 2.5 per cent a year and that returns of 5 per cent a year are ploughed back into the fund for an “accumulation period” of 27 years. Further details in chapter 6 of Age Shock.

11 The case for non-means-tested pensions is powerfully advanced in Larry Willmore, ‘Universal Pensions for Developing Countries’, World Development, Vol 35, No 1, 2001.Willmore points out that, if thought desirable, taxes can claw back some of the pension paid to the rich.

Economic and Political Weekly July 21, 2007

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