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No country has ever delivered primary and secondary education to the majority of its children without financing it mainly through taxes. In the eighteenth century and part of the nineteenth, the leading countries passed up chances to capture the gains from public schooling of the masses. In Britain and the Netherlands, the payoffs from basic schooling already promised high rates of return, privately and socially, partly by interacting with the rise of commerce. Yet these two leaders delayed for at least a century and a half, partly because of church-school issues and more fundamentally because those with political voice resisted paying taxes to educate the children of others.
Once the political will was mustered to launch universal primary education, adults’ years of school not only grew, but became progressively more equal. The data on years of school worldwide since 1870 show “convergence, big time” in schooling attainment in all countries. This growth and leveling of schooling was, again, dominated by the rise of tax-based public schools. Since before 1914 the Americans were leaders in the quantity of schooling, as measured by years of enrollment and of adults’ accumulated education. Yet as best one can tell from indirect and circumstantial evidence, the United States never led the world in the quality of primary and secondary education.
Starting from estimates of fiscal distribution within each of 53 countries, we can begin mapping a history of how redistribution has evolved historically, and to project some influences on its trends in the next few decades. There has been a global shift toward progressive redistribution over the last hundred years in all prosperous countries. The retreats toward regressive redistribution have been rare and have been reversed. As a corollary, the disturbing rise in income inequality since the 1970s owes nothing to any retreat from progressive government redistribution. Adding the effects of rising subsidies for public education on the later inequality of adult earning power strongly suggests that a fuller, longer-run measure of fiscal incidence would reveal a history of still greater shift toward progressive redistribution, most notably in Japan, Korea, and Taiwan. See Appendix B for detailed sources and notes.
This chapter first identifies (1) how an older population threatens public pensions, (2) some popular counter-arguments that discount pension fears, and (3) the budgetary logic that pension programs must respect. It then provides a twenty-first century global geography of which countries have been courting pension trouble and which have been insuring themselves against it. There follow predictions of which countries will have, and which will not have, budgetary leeway to improve the generosity of public pensions by 2050, without raising tax burdens and without forcing cuts elsewhere in the government budgets. Many countries has no such leeway, given their likely economic growth and their speed of population aging. Finally, to these results about fiscal sustainability is added a listing of some countries that are most guilty of short-changing investment in the young in favor of transfers to the current generation of elderly. Appendix C adds budgetary algebra and each country’s forecasted leeway to 2050.
Other regions are indeed following paths that diverge from the route taken by the industrialized leaders over the last two centuries. In terms of the overall effort to spending tax money on social programs, both for social insurance and for public education, while the later-developing regions have spent lower shares of GDP than do the leading rich countries today, they pay higher tax shares for social spending than did the leaders did at the same levels of real income in the past. Fifty years from now, social spending will well take more than twenty percent of GDP in Japan and many countries of Eastern Europe, and even North America. Yet elsewhere many countries, some with low social spending and some with high, appear to be making wrong choices within their social budgets. This criticism applies especially to India, Turkey, Greece, Latin America, and other nations within the global South. These countries generally have lower PISA scores, lower GDP per person, and higher inequality to show for it.
Larger social spending budgets have not produced any net loss of GDP, or in skills, or in work. Without any such costs, Europe’s welfare states have produced greater equality, cleaner government, and even longer life. So says the international evidence for any decade or combination of decades back to 1880, before which there was little social spending at all. The belief that greater social spending must somehow shrink the size of the economic pie is in trouble, and is likely to keep retreating in the wake of the slump of 2020.
Since 1914 rich countries have shifted their social spending missions, away from anti-poverty policies and mass schooling and toward subsidies to the elderly. Over r4ecent generations, this mission shift has probably compromised both income equality and income growth. The global mission shift toward public pensions may have been due in large part to improvements in life expectancy, which allowed longer life past work and contributed to political “gray power.” The inference about gray power springs from the fact that public pension spending rose even per elderly person, and not just at the rate of population aging. Its per-person generosity rose faster than the rise in educational spending per child of school age. The rising demand for government pensions was probably linked, in addition, to a quiet global change in the role of intra-family transfers. Career and family developments may have raised public pressure for more government support of the elderly.
Human societies have always needed safety nets to catch those who end up in need. The risks have always been there. Only recently has there been a global surge in government social spending. The major historical issues raised by this long delay are introduced in this chapter. Readers are given spoiler alerts about whether it had to be government that spread the nets, and about whether large-spending countries got the mix of social spending wrong more often than did low-spending governments. The conventional arguments for and against tax-based social spending are introduced.
In reforming pension systems to assure sustainability and equity, conventional practice has called for a “three pillars” approach advocated in the 1990s. This chapter calls for significant revision in that approach. Three countries’ major pension surgeries in three countries – Chile, Singapore, and Sweden –are subjected to a post-operative appraisal. The main verdict is that a country can achieve sustainability plus insurance without the problematic second pillar built on payroll deductions in the formal workplace. The first and third pillars suffice, given political consensus. Chile’s famous pension reform has been emulated but misunderstood, for reasons detailed here. Singapore’s mandatory payroll-taxing system had succeeded in accelerating economic growth, but at the expense of reasonable returns to pensioners. Sweden’s notional defined contribution plan despite its name, is a sensible first-pillar approach, indexing pensions to demographic and economic movements.
Immigration surges have complex economic effects, and nationalist backlash has complex effects on social policy. The economic and fiscal effects of immigration are mixed in the short run, though clearly positive over the generations. There are four policy options relating to immigration and social safety nets: keeping immigration free, stopping it, discriminating again immigrants in entitlements, and selectivity in immigration. Chapter 11 weighs the political likelihoods.