In a historic shift, OECD countries are going to have to welcome migration
Traditionally, Indian workers have been keen to migrate into OECD countries, which have restricted entry. Things are likely to increasingly turn around: many OECD countries will solicit Indian workers. Traditionally, Australia and Canada have been relatively migrant-friendly, while Western Europe has had greater ethnic friction with immigrants. How-ever, most OECD countries are facing deep problems with low fertility rates, an ageing population and acute fiscal stress, caused by poorly thought pension provisions. Greater migration inflows are their only way out.
For the large part, 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 do a pension system is to build 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 their pensions because of this constraint, the elderly feel cheated.
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 their pensions because of this constraint, the elderly feel cheated.
In some countries, it is estimated that a 30% income tax will be needed to merely pay pensions to old people, thus driving up the total income tax rate required to levels such as 50%. Hence, politicians and governments are increasingly realising that the tax revenues from young migrants are essential for fulfilling the ambitious pension promises. These countries are likely to find some middle road, of partly reneging on pension promises and shortchanging their elderly and partly shoring 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. “Today it has become apparent that fertility rates decline, even in poor countries, with an increase in female literacy.” 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.
| • OECD countries do not have enough young people to work and pay taxes • Companies will have to relocate themselves out of these countries |
that they remain competitive. Services will be outsourced to obtain higher productivity. Massive investment flows will come into India from pension funds, to build productive capacities in Indian companies. These firms 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 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 these workers can pay. Spain has recently legalised 800,000 illegal migrants, putting the issue on the front burner for other European nations. The next few years are likely to see significant changes in European attitudes.