Get young Indians to pay for old Europeans

Indian Express, 11 April 2005

OECD countries will be tempted to legalise illegal immigrants as workers are needed to pay income tax to fund pension schemes

Our traditional notion is that Indian workers are keen to migrate to OECD countries, and OECD countries restrict giving out visas. Things have been changing on this score, and are likely to increasingly turn around: Many OECD countries will solicit Indian workers. Traditionally, Australia and Canada have been relatively migrant-friendly countries, and the countries of Western Europe have had greater ethnic frictions against immigrants. Emerging economic compulsions may, however, lead to a change in these attitudes. Most OECD countries are facing deep problems with low fertility rates, an ageing population, and acute fiscal stress caused by poorly thought out pension provisons. Greater migration inflows are their only way out.

Migration leads to complex political problems, particularly in today’s context of high unemployment rates and religious fundamentalism. But for the large part of the population, people are concerned with the smooth running of their lives, the ‘‘running of the shop’’ and not who is cleaning the metro—regardless of whether he is Serbian or Indian.

A major difficulty in many OECD countries is their use of ‘‘pay-as-you-go’’ pensions, where young people are taxed to pay an assured pension (called a ‘‘defined benefit’’) to old people. Today there is awareness that assured payments by the state are not sustainable if the tax base is shrinking, and that a safer way to create a pension system is to build up personal wealth in an individual account using ‘‘defined contributions’’ going into the account every month. But several decades ago, these ideas were not well understood, and many OECD countries do not have an individual account for each person in which pension wealth is built up. What the elderly population of today paid as social security taxes in their working years went to support their seniors, but today, there aren’t enough young people to work and pay taxes that would fund their pensions. If governments cut down their pensions because of this constraint, the elderly feel cheated. In some countries, it is estimated that a 30 per cent income tax will be needed to merely pay pensions to old people—thus driving up the total income tax rate required to levels like 50 per cent. Politicans and governments are hence increasingly realising that the tax revenues obtained from young migrants are essential for fulfilling ambitious pension promises. These countries are likely to find some middle road of partly reneging on pension promises and short-changing their elderly, and partly shoring up their tax revenues by inviting migrants.

‘‘Overpopulation of this planet is no longer a fear,’’ says Jan Karlsson, chairman of the Global Commission on International Migration. ‘‘At one time it was feared that the earth as a whole would become overpopulated. But today, it has become apparent that fertility rates decline, even in poor countries, with an increase in female literacy.’’ The problem facing the world today—and in the rest of this century—is that while the human population in this century may be at an all time high, after which it will decline, its distribution is going to create difficult issues. Countries such as Japan and Western Europe will have a largely ageing population that needs to be cared for, while countries such as India will have a large share of the young working population.

These demographic changes are today the most powerful forces that will reshape the world. Companies will relocate themselves out of the low working population countries so that they remain competitive. Services will be outsourced to obtain higher productivity. Massive investment flows will come into India from pension funds, to build up productive capacities in Indian companies. These Indian companies will then send goods and services back to OECD countries for consumption by the elderly. But beyond these flows of capital and goods, there is no escaping the fact that ageing societies will still need the human touch in terms of nurses and waiters, cleaners and watchmen. These can only be achieved by migration flows. Migrants will be welcome into OECD countries because they will perform such services and, equally important, they will pay taxes which are required to pay pensions to old people. Sometimes these taxes—including social security taxes—can be as high as half their incomes.

Today there are millions of migrants in Western Europe. But as Karlsson points out, a large number of these are illegal. This means that they do not pay income tax. Western European countries not only need these workers to work and prevent them from becoming very high wage economies, they need the taxes that these workers can pay. Spain has recently legalised 800,000 illegal migrants, putting the issue on the frontburner for other European nations. The next few years are likely to see significant changes in European attitudes.

Ila Patnaik

Ila Patnaik