The World's Fraying Safety Nets
Leander, Tom, Global Finance
The world's complex web of social support systemspensions for the elderly unemployment benefits for laid-off workers, welfare for the long-term unemployed, disability insurance, health care subsidies-is everywhere looking inadequate or overly costly or both.The changes under way in different countries are only the start of what will be a long era of experiment and transformation as the global safety net is overhauled.
A persistent theme of almost all governments is to shift more and more of the burden to the private sector-especially pensions and health care financing. That is opening vast opportunities for some businesses: insurers, investment managers, many health care and pharmaceutical companies, and of course hordes of consultants. But most corporations face, instead, a dizzying complexity of legislative changes, increased liabilities, and in many cases higher taxes.
For global companies, the headaches are compounded manyfold.The fundamental issue may be global, but (to paraphrase the late US congressman Tip O'Neill) the safety nets and the efforts to reform them are all local. In no two countries are the social support problems, and the politics of reform, identical. China, for instance, may have the world's most adequate safety net: Its giant state companies take care of everything, from free housing and free vegetables to pensions and health care. But as economic producers, the companies are disasters; the entire system must be replaced. In Russia, by contrast, support systems have collapsed entirely.
Many Asian countries, stunned by economic downturns and facing corporate restructurings for the first time, have no unemployment support at all-to the jeopardy of their political systems (see "Asia's Unemployment Problem"). Japan's challenge is completely different: Its far-sighted pension system has been devastated by poor investment performance and mammoth deficit spending as the Tokyo government tries to pull the economy out of its comatose state. Meantime, both Japan's and South Korea's tradition of lifetime employment at big corporations is breaking down as companies struggle to become leaner.
Much of Western Europe must dismantle hugely generous but overly expensive unemployment and pension schemes, while most of Latin America is trying to build private pension systems from scratch (see "Latin America's Pension Bandwagon"). The United States keeps changing its complicated public-private pension system and is having inordinate troubles with health care support. Africa hardly appears on the safety net map at all.
For companies that operate in many lands, keeping track of reforms is almost impossible-and made more so by the fact that most governments tinker with their systems timidly: Changes are frequent and small. Take France, which is notorious for unemployment and retirement benefits so ample that workers barely have any incentive to work at all. Rarely do French companies, which must support this system with heavy tax payments, top up the government pension scheme with private pensions of their own. Foreign companies usually do, however if only to attract talented employees.
One US manufacturer offers employees at its French subsidiary a pension plan that augments the French government's plan. Like many countries, France requires private plans to make up the difference if the state payout is reduced. Last year the French government shaved some of its pension benefits, but the US company's compensation director didn't spot the change.
"Do you follow politics in France?" says Steven J. Kerstein, who heads international consulting at Towers Perrin, a US compensation adviser. "One of my clients did not-and was blindsided by reforms." The company suddenly discovered that pension payments due in France last year had quadrupled, to $40 million. "It's an example of an enormous process that's going on almost everywhere. New demands on the private sector have emerged as a result of the reform of the world's safety nets. …