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Charles Laffiteau`s Bigger Picture

Last update - Thursday, May 20, 2010, 12:44 By Charles Laffiteau

When the American and European pension systems were originally set up more than six decades ago, the average life expectancy in the world’s developed countries was around 68 years of age. As a result, deductions from workers’ wages to fund these pension schemes were based on the assumption that payments would last for an average of three to six years if they retired between the ages of 62 and 65.

But as of 2010, advances in healthcare and medical treatments have now extended the average life expectancy in the developed world to an average age of 80. That means pension schemes are now providing pension payments for an average of 12 more years than they were designed to handle.
Assuming a reduction in current and future pension payments is not an option, there are only three prudent courses of action under these circumstances: a 250-300 per cent increase in deductions from every worker’s wages to fund the additional years of pension payments; an increase in the retirement age by the same number of years; or some combination of the two.
But politicians in America and Europe are usually not too keen on giving their constituents bad news, so they look for a way to avoid dealing with the issue. The downside is that when the day finally arrives that they have to make unpleasant adjustments like cutting benefits and pay and raising the retirement age, these are much more painful and difficult to accept (think Greece).
The German political option means politicians have to be more honest with their constituents and start making smaller adjustments much earlier in the process. Nonetheless, the demographic pressures of a declining working-age population and increasing numbers of pensioners will result in significant pension scheme changes.
The American social security system has already increased workers’ contributions by five per cent and begun to raise the retirement age to 67 (and will continue to raise it gradually). But because America has a higher fertility rate, thanks to its legal and illegal immigrants, it doesn’t have to use reductions in current or future benefits to address its funding problems.
Make no mistake, I am not suggesting that throwing open your doors to legal and illegal immigrants is the solution to the developed world’s under-funded pension schemes. What I am suggesting is that if developed countries allow more immigration from the developing world, they can avoid cutting benefits to future retirees and mitigate some of the pain associated with increasing workers’ contributions to their pension schemes.
Of course the issue of under-funded pension schemes is not exclusively the province of developed countries. We live in an increasingly interconnected, globalised world where no country or region is immune to the problems experienced in other parts. One of the lessons learned from the credit crunch is that, while it was caused by the financial excesses of the west, developing countries like Brazil and China also suffered because they rely on the developed world to buy their exports.
If western countries don’t fix their pension scheme problems soon, then the inevitable cuts in benefits for pensioners and higher taxes for workers will translate into less money for both groups of citizens to spend on imported consumer goods.
So if immigration helps America address its pension problems, why are some Americans so upset about illegal immigration? I will discuss the most common myths about immigration next time.

Charles Laffiteau is a US Republican from Dallas, Texas who is pursuing a PhD in International Relations and lectures on Contemporary US Business & Society at DCU


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